Nasdaq shoot higher despite aggressive pricing; Silver Standard muted in gray; Boston Private holds firm

By Kenneth Lim

Boston, Feb. 21 - Nasdaq Stock Market Inc.'s new 2.5% convertible due 2013 arrived at the aggressive end of talk yet still had a strong debut, trading up more than 3 points outright.

The convertibles market in general remained quiet beyond the new Nasdaq offering.

Silver Standard Resources Inc.'s planned offering of 20-year convertibles failed to strike a note in the gray market amid whispers of a poor stock borrow and possible tax complications.

Market remains edgy

Market activity continued to be lackluster on Thursday, and observers blamed a myriad of factors.

"It's mostly a difficult time in converts now," a Connecticut-based sellside trader said. "I think it's mostly because of liquidity, mostly the big banks pulling back...It's a very difficult environment, I don't see a lot of quotes here at all."

The trader said edginess on the big desks is trickling out to the rest of the market.

"Everybody's waiting on the big banks now, it doesn't take much," the trader said. "It's just one guy saying this isn't good, and then we're in the repricing universe. When you're in a repricing mode, buyers and sellers that normally would be so far apart become three times as far apart. That's just the way it works. It's just a poor market right now, and it's just no fun for me."

A New York-based desk analyst said a relatively quiet primary market, with only Nasdaq's and Silver Standard's offerings coming near the tail end of the week, also failed to provide any sparks. The holiday-shortened week may have played a role as well.

"I suppose you can say it's a quiet week partly because of the holiday, a lot of people are out," the analyst said.

Arris Group Inc.'s 2% convertible senior note due 2026 closed at 73 against a stock price of $5.95, up by ½ point outright. Arris stock (Nasdaq: ARRS) closed at $5.85, down by 1.02% or $0.06.

"We saw good activity in Arris," a sellsider said. "The stock blew up last week on earnings, but the bonds kind of found the bottom, they were slowly but surely improving as the week wore on."

Peabody Energy Corp.'s 4.75% convertible junior subordinated debenture due 2066 gained ½ point to end at 125 versus a stock price of $57.24. Peabody stock (NYSE: BTU) ended at $57.24, down by 4.14% or $2.47.

"They definitely have strengthened the last couple of weeks, they traded in line today," the sellsider said.

Nasdaq shoots out the gate

Nasdaq's new 2.5% convertible due 2013 was one of the bright sparks Thursday.

The new convertible, which priced at the rich end of talk, was seen at 103.75 bid, 104.25 offered against a stock price of $40 in the afternoon as investors bought into its volatility. Nasdaq stock (Nasdaq: NDAQ) closed at $39.96, up by 2.2% or $0.86.

The convertible priced with an initial conversion premium of 41%. Price talk guided for a coupon of 2.5% to 3% and an initial conversion premium of 35% to 40%. There is a greenshoe of $25 million.

"I had it at around Libor plus 400 basis points and about a 41% vol, and it came pretty much spot on, not a big surprise there," a New York-based analyst said.

JP Morgan Securities Inc. and Banc of America Securities were the bookrunners.

The bonds are non-callable and there are no puts.

Nasdaq is a New York-based provider of securities listing, trading and information products and services. The company said the proceeds of the deal would be used to fund its combination with OMX AB, investment in the Dubai International Financial Exchange and proposed acquisitions of the Philadelphia Stock Exchange Inc. and the Boston Stock Exchange, as well as to pay debt.

Underlying the interest in the new convertible was optimism about the volatility on the stock, observers said.

"People liked the vol on the name," a sellside analyst said. "Exchange volatility has been pretty good over the recent past, so people liked that aspect. And these are the only exchange-company bonds out there, and they're really the only way to get exposure to that sector. They did price on the aggressive end, and even with that it did really well."

A sellside trader added: "I would suggest people were perceiving their credit as OK. They model perhaps on the aggressive side on the vol assumption, but people are thinking maybe the vol may be worth taking the option on."

Another trader acknowledged that the deal did well, but complained that the terms were nevertheless aggressive.

"Pricing power is still in the hands of the sellers," the trader said. "I think 2.5%, up 40% is really not in my realm of attraction at all. It worked, but you don't have to like them."

Silver Standard's borrow seen tough

Silver Standard's planned $120 million offering of 20-year convertible senior unsecured notes stayed quiet in the gray market ahead of post-market pricing on Thursday, with expectations that the deal will mostly go into outright hands with a tough borrow picture.

The offering was talked at a coupon of 4% to 4.5% and an initial conversion premium of 30% to 35%. Silver Standard stock (Nasdaq: SSRI) slipped 6.74% or $2.41 to close at $33.33 on Thursday.

There is an over-allotment option for a further $20 million.

UBS Investment Bank is the bookrunner of the Rule 144A and Regulation S offering.

The convertibles will be non-callable for the first five years, with puts in years five, 10 and 15.

Silver Standard, a Vancouver, B.C.-based silver mining company, said the proceeds of the deal will be used to develop its Pirquitas project, to explore other properties and for working capital and other general corporate purposes.

"From what I'm hearing, the borrow's not that great on it," a New York-based analyst said. "The borrow's actually really bad. I would assume something like that would usually go to outright funds, especially with everything that's going on right now, and the fact that it's a mining company."

Another analyst mentioned chatter that some accounts could also be confused about tax issues related to investing in the offering.

Boston Private holds on reserve

Boston Private Financial Holdings Inc.'s 3% convertible senior notes due 2027 held steady on a dollar-neutral basis despite a drop in its stock after the company increased its reserves to cover potentially unpaid loans.

The convertible was 87.75 bid, 88.75 offered against a stock price of $17 on Thursday. Boston Private common stock (Nasdaq: BPFH) fell 26.58% or $5.33 to close at $14.72.

"The stock is down, the bonds are holding in line," a sellside trader said.

Boston Private, a Boston-based bank holding company, said its First Private Bank & Trust unit will increase its loan-loss reserves by $16 million to $19 million for the quarter ending Dec. 31 because of potential bad loans in Southern California. The provision could lower Boston Private's earnings by 27 cents to 31 cents per share.

"The story here is they had guys who kind of came in and decided to take a more conservative approach to their portfolio and raise their reserves," the trader said.

The trader reckoned that the convertible will continue to hold.

"These bonds are just under 1.5 years to the put, and so trading at that level, obviously you have a fairly decent yield for a short-dated piece of paper," the trader said. "And the holding company, they do have a decent credit."

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