Royal Gold looks cheap, talk revised; Smithfield Foods 'holds up' on hedge after earnings

By Rebecca Melvin

New York, June 14 - Royal Gold Inc.'s planned $325 million of seven-year convertible senior notes was viewed as cheap by market players Thursday, and initial price talk was tightened up during marketing ahead of final pricing expected after the session close.

Royal Gold price talk was revised to 2.75% to 3% for the coupon and 35% for the initial conversion premium, from a 3.125% to 3.625% coupon and a 30% to 35% premium, according to a syndicate source.

There was little or no gray market activity during the session in the planned notes, but the paper was offered at 102.875 in the gray late in the day, a market source said.

Back in established names, Smithfield Foods Inc.'s convertibles were pulled into trade and slightly lower outright but even on a dollar-neutral, or hedged, basis after the Smithfield, Va.-based pork producer reported weaker-than-expected earnings on higher sales.

Health Care REIT Inc. was active and traded less than a quarter to parity after the Toledo, Ohio-based real estate investment trust, focused on seniors housing and health care real estate, announced it is acting on an upcoming call and/or put on about $168.09 million outstanding of its 4.75% convertible notes due 2027.

The call was expected, a New York-based trader said.

Also seeing trade was Virgin Media Inc.'s 6.5% convertibles due 2016, which is a name that had caught a bid in recent days but which dropped off again just as suddenly. On Thursday, it traded about unchanged on flat underlying shares.

Overall, the market was described as quiet.

"This market is horrible. There's no liquidity to buy or sell," a New York-based trader said.

Market players had anticipated that volumes would be thin this week ahead of the general elections to be held in Greece this Sunday. The election result may not bring complete clarity regarding the nation's debt situation and prospects for remaining in the euro. It is being held, after all, because politicians failed to agree on a government after an inconclusive vote May 6. Nevertheless, the date is viewed as a market catalyst ahead of which some players are hesitant.

Greece's stock index climbed 10% on Thursday after an unofficial poll pointed to a victory by the pro-austerity party New Democracy.

In economic data, initial jobless claims rose unexpectedly by 6,000 to 386,000 in the week ended June 9, according to the Labor Department. Economists had expected claims would fall to 375,000 from a previously reported 377,000 the prior week.

In addition U.S. consumer prices fell in May in line with expectations amid lower energy costs. Excluding food and energy, consumer prices rose 0.2% from April, also matching economists' forecasts.

U.S. equities rallied in the face of these data on expectations that a worsening economic picture may draw action by the Federal Reserve to implement further monetary stimulus after its Federal Open Market Committee meeting next week.

Royal Gold looks cheap

Price talk on Royal Gold's planned $325 million of seven-year convertible senior notes was tightened during marketing Thursday to 2.75% to 3% for the coupon and 35% for the initial conversion premium.

Initially the registered, off-the-shelf deal was talked at a higher 3.125% to 3.625% coupon and a premium range of 30% to 35%.

The deal had been viewed as very cheap, and some players half expected pricing to be revised or at a minimum for the deal to come at the rich end of guidance.

One source saw the deal at fair value of 104.95 at the midpoint of original talk, using a credit spread of 500 basis points over Libor and a 30% vol.

"This bond looks very cheap especially when you value the make-whole option properly," a New York-based sellsider said, adding that certain systems do not model the make-whole properly.

The bond has a coupon make-whole feature in the event that the company calls the bonds. Making payment on remaining coupons is not a standard feature of convertible bonds, a sellsider said.

The deal was being sold via bookrunner Goldman Sachs & Co. with lead managers HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc.

The notes are non-callable for three years and then are provisionally callable if the stock price exceeds 130% of conversion.

"I like Royal despite the fact it is seven-year paper. It will be one of very few balanced convertibles in the gold and in general natural resource industries," a New York-based sellsider said.

Proceeds will be used to repay amounts outstanding and to terminate a term loan facility. Remaining proceeds will be used for general corporate purposes, including acquisitions of additional royalty interests.

Royal Gold is a Denver-based precious metals royalties acquisitions and management company. As of March 31, the company owned royalties on 38 producing properties, 26 development stage properties and 127 exploration stage properties, according to a prospectus.

During the nine months ended March 31, the company derived about 67% of its royalties from gold, 11% from copper, 11% from nickel, and 7% from silver.

Ninety-two percent of its portfolio properties are from mines in the United States, Mexico, Canada, Chile and Australia, the prospectus stated, noting that these were stable countries.

Smithfield holds up on hedge

Smithfield Foods' 4% convertibles due 2013 were seen essentially unchanged at the close at 105.5, or down a little more than 1% outright, and flat on a dollar-neutral basis, according to a New York-based analyst.

The paper trades now at a 33.5% delta, after being held on a higher delta the previous day, the analyst said.

Shares of the Smithfield, Va.-based pork producer ended down by $1.11, or 5.8%, at $18.46.

"It held up on hedge," the analyst said.

The company's fiscal fourth-quarter net income was $79.5 million, or 49 cents per share, in the three months ended April 29, compared to $98.4 million, or 59 cents per share, in the year-earlier period.

Excluding one-time items, the company earned 43 cents per share, which missed analysts' estimates by 10 cents.

Sales were up 3% to $3.21 billion but missed expectations for revenue of $3.26 billion.

The results were hurt by lower margins as retailers paid less for its fresh pork products.

Smithfield also said Thursday that its board is allowing the company to buy up to an additional $250 million of common stock over the next two years since a prior $250 million stock-repurchase authorization has nearly been exhausted.

Mentioned in this article:

Health Care REIT Inc. NYSE: HCN

Royal Gold Inc. Nasdaq: RGLD

Smithfield Foods Inc. NYSE: SFD

Virgin Media Inc. Nasdaq: VMED

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