Convertibles better bid; new Cowen trades up; Encore Capital on tap; existing Encore quiet

By Rebecca Melvin

New York, March 5 - U.S. convertibles were seeing better buyers on Wednesday, and many names were moving upward, a New York-based trader said.

"It feels like most of the market is better to buy," the trader said.

Cowen Group Inc.'s newly priced 3% convertibles jumped after the New York-based financial services company priced a slightly upsized $130 million of the five-year senior notes at mixed terms.

The new Cowen was seen at 102.5 bid, 103.5 offered in the early going and moved up to 105.5 bid, 106.5 offered by early afternoon. Cowen shares began flat to weaker and ended a bit higher.

Some traders said that they wanted to be involved in the deal but it was on the small side and they weren't able to. There were other financials in play though. Mortgage finance convertibles like Colony Financial Inc. and Redwood Trust Inc. were better to buy as people are chasing yield, a New York-based trader said.

Meanwhile, specialty finance company Encore Capital Group Inc. launched a new deal of $125 million of seven-year convertible senior notes that was expected to price after the market close.

The new deal was almost identical in structure to the Encore notes priced last June except that settlement of the new deal is fully optional, meaning the principal and any in-the-money portion can be settled in cash, stock or a combination of both, a syndicate source said.

Encore Capital's existing 3% convertibles due 2017 were heard at 161.125 bid versus an underlying share price of $47.50.

DryShips Inc. was a big feature of trade, gaining about a point to 99.5 bid, 100 offered on the heels of the company's annual report filed late Tuesday, a trader said.

Tesla Motors Inc. remained active also. There has been hedge fund demand for the older Tesla convertibles, a New York-based trader said. "Hedged players see a lot of value in the old Teslas and not the new."

Solar names were not active, sources said, despite a sharp move lower in the shares of Canadian Solar Inc., which reported an earnings miss and weak guidance. The Markham, Ont.-based solar power components company priced its convertible deal in mid-February. One trader said the Canadian Solar 4.25% convertibles "were probably expanding on swap on the big move down. They just raised a bunch of money with the convert, so cash is not a concern."

There were some SolarCity Corp. convertibles changing hands, though, and pricing was lower outright, but flat to 0.25 point higher on a dollar-neutral basis amid lower shares for the San Mateo, Calif.-based distributed energy provider.

The SolarCity convertibles traded down to 147.5 bid, 148.5 offered with the underlying shares at $78.00, which was down on an outright basis from 153 bid, 154 offered coming into the day but flattish to higher on hedge.

"I haven't seen any weakness in them," a New York-based trader said.

Elsewhere, Navistar International Corp.'s 3% convertibles held in despite a sharp drop in the stock after the Lisle, Ill.-based truck, bus, military vehicle and engine maker reported a wider-than-expected quarterly loss.

The Navistar report revealed a cash balance that was higher than expected, so there are no worries for the short-dated 3% convertibles, a trader said.

Meanwhile MGM Resorts International was a little cheaper on a dollar-neutral basis by about 0.25 point amid outright selling as the underlying shares of that company continue to move higher.

New Cowen sees strong demand

Cowen's new 3% convertibles due 2019 moved up to 105.5 bid, 106.5 offered in early afternoon trading with shares gaining to as high as $4.20. The bonds traded in the early going at 102.5 bid, 103.5 offered with the shares of the New York-based financial services company flat to weaker.

"The deal did pretty well," a New York-based trader said.

Cowen shares ended higher by a penny at $4.11 following a sharp drop on Tuesday.

The deal was upsized slightly to $130 million from $125 million and came at the cheap end of the coupon range and at the midpoint of the premium range.

The brokerage company with an asset management business has a market capitalization of about $478 million and completed the deal with a call spread, which raises the premium from the company's perspective to 75%.

Joint bookrunners were Nomura Securities International Inc. and Cowen and Co. LLC.

The non-callable notes will mature on March 15, 2019. They are contingently convertible into cash only after Sept. 15, 2018.

About $17.8 million of the proceeds will be used to pay the cost of the convertible note hedge transaction. The company also expects to use $340,000 of proceeds to repurchase shares of common stock from initial purchasers of the notes. Remaining proceeds are for general corporate purposes.

Encore Capital on tap again

Encore Capital's $125 million of seven-year convertible senior notes were expected to price after the market close at a coupon of between 2.75% to 3.25% and a premium of 22.5% to 27.5%.

The structure of the seven-year bullet convertibles matches the structure of its existing convertible bond priced last June, but the older bond has net share settlement after the principal is paid in cash.

The Rule 144A offering has an $18.75 million greenshoe and was being sold via bookrunners Morgan Stanley & Co. LLC, Barclays, Deutsche Bank Securities Inc. (active) and Citigroup Global Markets Inc. and RBS Securities Inc. (passive).

In connection with the sale of the notes, the company planned to enter into capped call transactions with initial purchasers of the notes or their affiliates. The capped call is intended to reduce potential dilution and/or offset cash payments the company is required to make in excess of the principal upon conversion if the share price is greater than the strike price of the capped call transactions, which will initially correspond to the initial conversion price of the notes.

Proceeds are expected to be used to pay the cost of capped call transactions and for general corporate purposes, including working capital.

The notes are non-callable, with no puts.

Encore is a $1.2 billion market cap company based in San Diego and is a consumer accounts receivable management firm.

Existing Encore quiet

Encore Capital's existing 3% convertibles were heard at 161.125 bid versus an underlying share price of $47.50.

The company has two convertibles outstanding, including five-year notes priced in November 2012 and the seven-year notes priced in 2013. The notes priced in 2012 were not heard in trade.

"The other paper has done well; it has had two performing issues," a New York-based trader said of the two older Encore issues.

Mentioned in this article:

Canadian Solar Inc. Nasdaq: CSIQ

Colony Financial, Inc. NYSE: CLNY

Cowen Group Inc. Nasdaq: COWN

DryShips Inc. Nasdaq: DRYS

Encore Capital Group Inc. Nasdaq: ECPG

MGM Resorts International NYSE: MGM

Navistar International Corp. NYSE: NAV

Redwood Trust Inc. NYSE: RWT

SolarCity Corp. Nasdaq: SCTY

Tesla Motors Inc. Nasdaq: TSLA

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