Genesis soars on buyout; Symantec falls outright on warning; Headwaters strong in gray; issuance picks up

By Kenneth Lim

Boston, Jan. 16 - Genesis Healthcare Corp. jumped sharply on Tuesday following news of a buyout, as its convertible improved outright and on a dollar-neutral basis despite initial confusion over the takeover protection.

Symantec Corp. also improved dollar-neutral, but was lower outright after the company warned of disappointing third-quarter results and lowered its outlook for the year.

Headwaters Inc.'s new deal received strong bids in the gray market ahead of pricing, expected after the market closed, and analysts described the offering as cheap even after price talk was moved toward the rich end.

The primary market began the week with a bang, as five new deals were announced. Along with Headwaters, National Financial Partners Corp., Isis Pharmaceuticals Inc., Washington Real Estate Investment Trust and Edge Petroleum Corp. intend to price their offerings within the next week.

Except for a handful of names with new-driven activity, the secondary convertible market was generally quiet with a lack of a clear direction on the equity scene.

"It's pretty slow," a buyside convertible trader said. "It's been active on select stocks, but stocks in general are pretty much flat for the day. There's just not that much trading activity that I've seen."

Genesis climbs despite early worry

Genesis Healthcare's 2.5% convertible due 2025 climbed about 13 points outright and improved about 2 points on a dollar-neutral basis on Tuesday, after a $1.25 billion privatization deal sent holders scrambling to decipher the takeover protection language in the indenture.

The convertible traded at 127.5 against a stock price of $61.40. Genesis stock (Nasdaq: GHCI) climbed 15.91% or $8.41 to close at $61.26.

"Guys made a couple of points on those," a buysider said. "Turns out they have takeover protection."

Genesis said Tuesday that private equity firms Formation Capital LLC and JER Partners will pay $63 per share in cash for the company and assume about $450 million in debt. Shareholder and regulatory approval is still required for the deal to be completed. Kennett Square, Pa.-based Genesis operates eldercare and nursing home facilities and provides elderly health services.

Convertible holders were initially confused about whether the privatization would trigger the convertible's takeover protection and get the make-whole premium, which a sellside analyst estimated was worth about 16 points.

Xtract Research managing partner Michael Knox, whose company provides research services focused on fixed-income securities documents, said the Genesis issue kept him busy on Tuesday.

"There was a lot of controversy today regarding the make-whole for GHCI," Knox said. "We had record volume on Xtract Research today with people reviewing the indenture and the exact language. The company did confirm to us that the fundamental change is triggered and that the make-whole will be paid to holders who convert in line with the terms of the indenture."

At the heart of the "big debate" was the way the make-whole premium in the indenture appeared to apply only to a specific definition of a fundamental change, a sellside convertible analyst said.

The make-whole clause specified that it would apply only when the company "consolidates with, or merges with or into, another Person or any Person consolidates with, or merges with or into, the Company." But the indenture's other definitions of what constituted a fundamental change - a change in control of the company's stock, a change in control of the board of directors, a sale of assets or liquidation - were not mentioned.

"The question was whether this is a merger or something that falls within this definition," the analyst said. "It's pretty ambiguous."

The analyst said it could have been argued either way.

"I think the case could have been made that it doesn't apply," the analyst said. "I'm sure the guys taking over the company wouldn't want to spend more money than they have to."

Whether the make-whole applied made a big difference, the analyst explained.

"It's about 13.5 points or 12% difference," the analyst said.

Symantec falls on outlook

Symantec's 0.75% convertible due 2011 and 1% convertible due 2013 tumbled about 10 points outright on Tuesday after the company warned of disappointing results and lowered its outlook.

The 0.75% convertible traded at 109.125 against a stock price of $17.875, while the 1% convertible changed hands at 110.25 versus a stock price of $18.20. Symantec stock (Nasdaq: SYMC) fell 13.13% or $2.69 to close at $17.79.

While the drop was negative for outright holders, hedged investors came out slightly better.

"They also opened up a couple of points," a buysider said. "Hedge guys would have done pretty well on both of these [Symantec and Genesis Healthcare]."

Symantec on Tuesday warned that it now expects earnings per share of only 10 to 11 cents for the fiscal third quarter ended December, below its earlier forecast of 14 to 15 cents. Symantec forecast revenue for the March quarter at between $1.24 billion and $1.27 billion, short of Street estimates for $1.4 billion. For the fiscal year, the company sees earnings per share of 36 to 39 cents, from its earlier outlook of 46 to 56 cents. Symantec cited a greater than expected amount of deferred revenue for the shortfall.

The sent the stock reeling, but a sellside convertible analyst said Symantec's credit remains solid.

"It's not a company that from a credit perspective I really worry about," the analyst said. "The deferred revenue, it seems to be a timing issue as much as anything else...I don't have any long term concerns."

The analyst said that the issues seemed fairly specific to Symantec, and did not appear to have any implications for the rest of the sector. Symantec is a Cupertino, Calif.-based computer security specialist.

But the analyst did not think that the stock's slide was a surprise.

"They took the revenue number down slightly, they took the earnings number down quite a bit for the march quarter...when you have a tech stock that lowers guidance, 13% [in the stock's decline] seems to be normal," the analyst said. "Could have been worse."

Headwaters seen as cheap

Headwaters' planned $125 million of seven-year convertible senior subordinated notes was bid about 0.25 to 0.5 point higher in the gray market on Tuesday, and price talk was shifted toward the rich end.

New price talk guided for a coupon between 2.5% and 2.75% and an initial conversion premium between 25% and 27.5%. Headwaters stock (NYSE: HW) closed at $23.12, down by 6.55% or $1.62 after the deal was announced.

The notes, which were expected to price after the market closed, were initially talked at a coupon of 2.5% to 3% and an initial conversion premium of 22.5% to 27.5%.

The convertibles were offered at par.

There is an over-allotment option for a further $25 million.

Morgan Stanley, JP Morgan and Deutsche Bank are the bookrunners of the Rule 144A offering.

Headwaters, a South Jordan, Utah-based provider of energy and construction products and technologies, said the net proceeds of the offering will be used to pay off part of a senior secured credit facility. It is also concurrently entering into convertible note hedge and warrant transactions.

"Headwaters looks good," a buyside convertible bond trader said. "It's attractive pricing. Some people are having slight borrow issues, some are not...but it should do well."

The buyside trader said Headwaters' older 2.875% convertible due 2016 did not trade much in reaction to the new offering, and explained that the two series of notes were unlikely to be compared against each other.

"The old one is provisionally callable in six months, so you really can't adequately compare the two," the buyside trader said.

A sellside convertible analyst said the offering looked more than 3% cheap even at the new price talk. The sellside analyst expects the early borrow issues to clear up.

"I heard that today the borrow was slightly worse than top rate, but...it's probably going to improve and we're modeling it with a top rebate," the analyst said.

More new deals ahead

After a slow first full week of 2007 for the primary market, issuance picked up considerably on Tuesday with four more deals, excluding Headwaters.

New York-based National Financial Partners' $200 million offering of five-year convertible senior notes leads the pack in terms of size. Expected to price Wednesday after the market closes, the deal is talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $30 million.

Goldman Sachs and UBS Investment Bank are the bookrunners of the registered off-the-shelf offering.

Carlsbad, Calif.-based Isis Pharmaceuticals has a $125 million offering of 20-year convertible subordinated notes also expected to price Wednesday after the market closes, talked at a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

There is an over-allotment option for a further $37.5 million.

Lehman Brothers is the bookrunner of the Rule 144A offering.

Rockville, Md.-based Washington REIT's $125 million of 19-year convertible senior notes will come with essentially the same structure as its existing 3.875% convertible senior notes due Sept. 15, 2026. The coupon and conversion premium on the new notes have not been set. The timing of the Washington deal was not disclosed.

Credit Suisse is the bookrunner for the registered off-the-shelf offering.

Houston-based Edge Petroleum's $100 million of perpetual convertible preferred stock will only price on Jan. 23 after the market closes. It is talked at a dividend rate of 5.75% to 6.25% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $15 million, or 300,000 preferred shares.

JP Morgan and Raymond James are the bookrunners of the registered off-the-shelf offering.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.