New Spectranetics expands 4 points on hedge; New Mountain quiet; Renewable Energy looks cheap

By Rebecca Melvin

New York, May 29 - Spectranetics Corp.'s newly-priced 2.625% convertibles jumped on an outright and dollar-neutral, or hedged, basis on Thursday as trading began in the $200 million of the 20-year convertible senior notes from the Colorado Springs, Colo.-based maker of single-use medical devices. The deal had priced toward the tight end and beyond the tight end of talk.

The new Spectranetics bonds closed at 102.5 bid, 103.5 offered with the underlying shares at $21.84. That level represented a 4 point expansion on a hedged basis, as the company's shares ended lower by 2.5%, a syndicate source said.

Spectranetics was the name of the day, with volume dominating the day's trading action.

New Mountain Finance Corp.'s newly priced 5% convertibles were heard at 100.5 bid in the early going after the New York-based investment company priced $100 million of the five-year convertible senior notes at the cheap end and midpoint of talk.

New Mountain shares were up 21 cents, or 1.5%, to $14.37 at one point but pared those gains to end higher by 12 cents, or 0.9%, at $14.28.

Also in primary action, Renewable Energy Group Inc. launched an offering of $125 million of five-year convertible senior notes that was seen pricing after the market close.

The deal was looking very cheap, and was coming with a capped call. But borrow was a consideration as market players calculated the bond's value ahead of final terms being fixed.

One source was getting the Renewable bonds worth 105.7, using a credit spread of 650 basis points over Libor and 35% vol. at the midpoint of talk.

A second market source said that he got the new paper worth more than 4% cheap in his valuation. "But the stock is getting crushed today," he added.

In fact, Renewable Energy shares ended down 93 cents, or 8.5%, at $10.01.

In economic news, the U.S. economy shrank in the first quarter by 1%, the Commerce Department said Thursday in a revision of its GDP estimate. In response, equities traded higher, with the S&P 500 stock exchange hitting another record high, while the yield on U.S. 10-year Treasury notes was down at about 2.4%, its lowest in about a year.

Yields have slipped this week in expectation of further policy easing by the European Central Bank next week, sources said.

The S&P 500 stock index added 10.25 points, or 0.5%, to 1,920.03 on Thursday; the Nasdaq stock market added 22.87 points, or 0.5%, to 4,247.95; and the Dow Jones industrial average gained 65.56 points, or 0.4%, to 16,698.74.

New Spectranetics expands

Spectranetics' new 2.625% convertibles due 2034 closed at 102.5 bid, 103.5 offered with the underlying shares at $21.84. That level represented a 4 point expansion on a hedged basis, assuming a delta in the mid-60% range, a syndicate source said.

The new paper opened early Thursday at 103.75 bid, 104.75 offered and traded up to 105 before action slowed somewhat, and the bonds were seen at 103.25 bid, 104.25 offered shortly before noon when shares were down about 19 cents, or 0.9%, at $22.20.

Spectranetics shares ended down 55 cents, or 2.5%, at $21.84 after starting the day higher. They dragged downwards gradually to their lows near the end of the session.

The bond was the most actively traded name in the convertibles market on Thursday even though the deal size was a moderate $200 million.

"It was an interesting story. People bought into the story, and we tried to price it right so that it will trade well too. Allocations were very tight," a syndicate source said.

Hedged-investor participation accounted for less than half, the source said.

Spectranetics will use proceeds to buy Fremont, Calif.-based AngioScore Inc., a maker of cardiovascular specialty balloons for $230 million in up-front consideration in addition to contingent commercial and regulatory milestone payments.

The acquisition, expected to close at the end of June, will be accretive to adjusted EBITDA in 2015, when Spectranetics expects to achieve $8 million to $10 million in cost synergies on a pre-tax basis.

Piper Jaffray & Co. was bookrunner of the registered offering, which has a $30 million greenshoe.

The notes are non-callable for four years, and then provisionally callable for three years if the company's shares trade above 130% of the conversion price for 30 consecutive days.

There are investor puts in years seven, 10 and 15.

There is takeover protection and conversion ratio adjustments for dividends paid on the common stock. The bonds will be physically settled.

Renewable Energy looks cheap

Renewable Energy, an Ames, Iowa-based biodiesel producer, was expected to price $125 million of five-year convertible senior notes after the market close that were talked to yield 2.75% to 3.25% with an initial conversion premium of 27.5% to 32.5%.

The five-year, non-call bonds have standard features including takeover protection and were coming with a capped call.

One trader pointed out that the company pays extra to pay off the capped call option. "They should hope the stock runs enough to turn the deal into equity, not pay a few million to stop that."

Stock borrow issues were part of the equation in valuations.

Assuming borrow was not a problem, a New York-based trader was using 750 basis points over Libor and 45% vol., he said

A second source said borrow was reduced, and was using 750 bps over Libor and a 40% vol,, and getting the paper right at fair value.

A third source said his firm "got regular borrow" and was using 650 bps over Libor and 35% vol., and getting the deal worth 105.7 at the midpoint of talk.

The registered, off-the-shelf deal has a greenshoe for $18.75 million and is being marketed by bookrunning managers BofA Merrill Lynch and Wells Fargo Securities LLC.

About $100 million of proceeds will be used to replace a letter of credit that guarantees the Gulf Opportunity Zone bonds issued in connection with the Louisiana-based Dynamic Fuels LLC biorefinery or to redeem those bonds.

Proceeds will also be used to pay the net cost of capped call, with remaining proceeds for general corporate purposes.

Mentioned in this article:

New Mountain Finance Corp. Nasdaq: NMFC

Spectranetics Corp. Nasdaq: SPNC

Renewable Energy Group Inc. Nasdaq: REGI

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