Selling hits convertibles: Radian, NetApp lower dollar neutral; Regis skids; Kaman adds

By Rebecca Melvin

New York, Nov. 16 - Selling hit the convertibles market on Tuesday along with a sharp selloff in the broader markets that was sparked off by worries over a possible rate hike in China and sovereign debt woes in Europe, namely a potential default for the government of Ireland.

Selling in convertibles - and there were buyers, too, one sellsider pointed out - hit both newer, longer-dated issues, which are susceptible to correction, and also paper of short duration.

Selling was "everywhere...indiscriminate, some of it justified and some not," a New York-based sellside trader said.

Among newer issues, Radian Group Inc.'s 3% convertible bond issue due 2017, which was a $450 million deal priced Nov. 8, was down by about a point on swap, changing hands at 92 versus a share price of $7.35. The drop outright was about 6 points from Monday, when the convertibles showed strength on Monday at 98.

Lennar Corp.'s 2.75% convertible bond issue due 2020, which was a $435 million deal priced Nov. 4, traded at 98 versus a share price of $15.70, which was indicated lower by about 0.5 point.

Developers Diversified Realty Corp.'s new 1.75% convertibles due 2040, which was a $350 million deal priced Nov. 1, shed 2 points to change hands at 98.

NetApp Inc. was also lower and weaker on swap by about 0.375 point as selling beset the data storage company.

Regis Corp. was active and traded down about 1.5 points dollar neutral. Shares of the salon operator plunged as much as 14% during the session after a New York Post report that said final bids for the business were lower than expected. The article cited unnamed sources as saying that interested buyers were looking for a price that would value the stock in the high teens, which was lower than its $20 share price on Monday.

Massey Energy Corp. was also weaker on an outright basis, and Micron Technology Inc. "came in" about 0.75 point on swap, sources said.

In the primary market, Kaman Corp.'s newly priced 3.25% convertibles traded up a little on its debut Tuesday with the underlying shares mostly flat.

RightNow Technologies Inc. was seen 0.75 point bid in the gray market ahead of final pricing expected after the market close. The Bozeman, Mont.-based software company launched a $125 million offering of 20-year convertibles after the market close Monday.

In the broader markets, nearly everything was in the red on Tuesday, including stocks, oil and gold. The Dow Jones Industrial Average fell 178.47 points, or 1.6%, at 11,023.50; the S&P 500 index closed down 19.41 points, or 1.6%, to 1,178.34; and the Nasdaq Stock Market sank 43.98 points, or 1.8%, to 2,469.84.

Convertibles followed suit. "The dumb thing, I think, is that guys are selling some of the exact trades they were trying to put on for markets like this...low premium, short-dated names with decent underlying credits," a New York-based sellside trader said.

"Once things settle down I expect these names will recover best - it's possible they are getting hit because people will actually show bids for them, even if they are down bids, as opposed to names that are very credit sensitive and could be down 5 or 10 points," he said.

Kaman adds a bit on debut

Kaman's newly priced 3.25% convertibles traded up a little bit early on their debut Tuesday to about 101 to 102 as shares remained flat, a syndicate source said.

The Bloomfield, Conn.-based aerospace and industrial distribution company upsized and priced the deal late Monday.

The $100 million offering was increased from $75 million originally planned.

There wasn't a lot of action in the new Kaman paper, sources said.

"I never saw the first color on Kaman," a New York-based sellside trader said.

But there was good enough demand for the bonds to merit upsizing and pricing at the tight end of talk, a syndicate source noted.

The deal was talked at 3.25% to 3.75% with an initial conversion premium of 25% to 30%.

Shares of the company stabilized after a big 7% to 8% drop on Monday. In the first half of the session Tuesday, shares were flat despite the overall downdraft in equities, and going into the close, the shares gained steam, pushing into positive territory to end up 51 cents, or 2%, at $26.63.

Kaman also entered into convertible note hedge transactions, which have the effect of boosting the initial conversion premium from the issuer's perspective to 70%.

The notes are seven-year bullets, with contingent conversion subject to shares being 130% of the conversion price for a specified period.

Proceeds from the Rule 144A offering will be used to pay down borrowings under Kaman's existing revolving credit agreement and for general corporate purposes, including future acquisitions and potential pension contributions.

Regis comes in 1.5 points

Regis' 5% convertibles due 2014 skidded outright and came in on a hedged basis by 1.5 points after a New York Post report that the Minneapolis-based hair salon operator may be acquired for a price that is lower than expected, a New York-based sellside trader said.

Citing unnamed sources, The Post reported that after taking final bids in an auction to sell itself last week, it might go with an offer in the high teens.

After announcing in August that it was seeking a buyer, Regis shares have jumped by about a third to $20.64 on Monday from about $15.00 in August.

Shares of the company ended down $2.62, or 12.7%, at $18.02 on Tuesday.

The convertibles traded at 135.321 versus a share price of $18.18 on Tuesday after trading at 154.54 versus a share price of $21.42 on an 85% delta on Nov. 11.

The Regis 5% convertibles are four-year paper.

Mentioned in this article:

Developers Diversified Realty Corp. NYSE: DDR

Kaman Corp. Nasdaq: KAMN

Lennar Corp. NYSE: LEN

Massey Energy Corp. NYSE: MEE

Micron Technology Inc. NYSE: MU

NetApp Inc. Nasdaq: NTAP

Radian Group Inc. NYSE: RDN

Regis Corp. NYSE: RGS

RightNow Technologies Inc. Nasdaq: RNOW

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