By Rebecca Melvin
New York, Jan. 19 - Ares Capital Corp. was looking cheap and heard higher by about a point in the gray market Wednesday; and even after the deal was upsized and terms revised ahead of final pricing, it is still looking cheap, market sources said.
Ares Capital's five-year convertibles offering was upsized to $500 million from an initially talked $300 million, and the talked coupon was tightened to 5.75% to 5.875% from 5.75% to 6.25%, with the premium adjusted to 17.5% to 20% from 17.5% to 22.5%.
MGIC Investment Corp. dropped outright and was lower by about a point on a dollar-neutral basis after the Milwaukee-based mortgage insurer reported an earnings miss and said it wasn't sure when it would ever make money on an annual basis.
Radian Group Corp., another mortgage insurer, was pulled lower on the MGIC earnings news, trading lower outright and down about a point on a hedged basis, sources said.
Likewise, a third member of the mortgage insurer group, PMI Group Inc., also took a hit.
"The MTG earnings drove them lower," a New York-based sellside trader said, though he added that the carnage could have been worse and there weren't as many sellers in the names as he expected.
Elsewhere, Symantec Corp. was active again in trade, with the Symantec 1% convertibles more active than the Symantec 0.75% paper. On Tuesday, Symantec was higher after the common stock received an upgrade from Deutsche Bank.
Overall, Wednesday was called a "very slow day," with most of the day's focus on the new Ares deal, which was seeing good outright demand.
People "need to own investment-grade paper," a New York-based sellsider said of Ares. "The struggle is what credit assumption to use. Libor plus 500 basis points at the midpoint of terms is fair value."
Another sellsider called the day "quiet," reporting that the day's most active issue was the Symantec 1% convertibles.
After the market close, Apollo Investment Corp. launched a $150 million offering of senior convertible notes that was seen pricing ahead of the market open on Thursday.
Internationally, the primary market also showed some life. Compagnie Generale de Geophysique - Veritas launched and priced Wednesday €315 million of five-year convertible bonds in the Oceane structure at the rich end of terms to yield 1.75% with an initial conversion premium of 25%. CGG Veritas is a Paris-based provider of geophysical equipment and services.
There was also a pair of Asian deals priced Tuesday, including Thailand's BTS Group Holdings Group PCL's 10 billion baht of five-year convertible bonds and Taiwan's Epistar Corp.'s US$280 million of five-year 0% euro-convertible bonds.
Ares upsizes, tightens terms
The Ares Capital deal was upsized by $200 million to $500 million of five-year convertible senior notes that were expected to price after the market close on Wednesday, sources said.
In addition terms were tightened to 5.75% to 5.875% for the coupon, down from a prior midpoint of 6%. The premium midpoint of talk was also pulled to just under 19% from a prior midpoint of 20%.
"Still looks cheap," a New York-based sellside trader said.
The Rule 144A notes will be offered at par via bookrunners JPMorgan, Bank of America Merrill Lynch, Wells Fargo and Deutsche Bank.
One sellsider said that he liked the deal "at 6% up 17.5%," and that revised talk was "still OK."
It's a good credit but with no volatility, a West Coast based sellside trader said. He expected a tight allocation with smaller-than-average hedge participation and mostly outright participation.
The New York-based private equity firm planned to use proceeds to repay outstanding debt and for general corporate purposes.
A New York-based outright buyside source said "the only strike against it is that it's a business development company," and he thought that meant some accounts would have restrictions against holding it.
Ares models cheap
Sources valuing the deal clustered around a credit spread of 450 bps to 500 bps over Libor and a 20% vol. to get it cheap at the midpoint of talk.
"People like [the Ares deal]. I am using 450 bps and a 2%, which models 3.4% cheap at mids," a New York-based sellside trader said, using the early talk.
The same source reported a gray market in the proposed securities at 100.375 to 101.375 earlier in the day.
"If you own outright, you have more downside protection here than in the common, because the credit is strong and this is senior debt, and you still get decent equity participation," the sellsider said.
Others argued that the Ares high common dividend at about 8% meant it was wiser to hold the common stock rather than the convertible.
"If you can own the common, it's a better deal than the convertible at 6% yield, with a 20% premium at the midpoint of talk," a sellsider said, referring to the common's 8% dividend.
A third source said his valuation modeled 3.2% cheap, using a credit spread of 475 bps over Treasuries and a 20% vol.
He argued that "on the surface" the 8.4% dividend yield seems high; but "the company has adopted a dividend reinvestment plan in which stockholders have elected to reinvest the majority of their cash dividends in additional shares of common stock. This is certainly a positive for the credit as the company does not pay out much in cash (only approximately $160,000 over the last nine months)."
He added that such a position was risky though, given that the shareholders have the right to opt out of the reinvestment plan and demand a cash dividend.
Mortgage insurers take a hit
Mortgage insurers as a group were down about a point on a dollar-neutral basis, and more outright, but selling wasn't as heavy as might have been expected.
"I'm very surprised that there weren't more sellers," a New York-based sellside trader said.
According to Trace data, about $21 million of MGIC's 5% convertible senior notes due 2017 traded and about $2 million of Radian Group's 3% convertibles due 2017, which priced in early November, traded.
The Radian 3% convertibles stood at about 100.25 versus a share price of $8.15 at the close of markets on Wednesday. That was down about a point on hedge and down about 8 points on an outright basis.
MGIC's 5% convertibles were seen at about 111.7 outright, down from 123.
PMI Group's 4.5% convertible senior notes due 2020 were also indicated lower but weren't seen in trade. The paper was quoted 87.75 bid, 88.75 offered versus a share price of $3.65.
Shares of the Walnut Creek, Calif.-based mortgage insurer slumped 70 cents, or 17.5%, to $3.29.
MGIC's shares slumped $2.39, or 20.5%, to $9.26; and shares of Radian tumbled $1.45, or 15%, to $8.19.
One sellsider said the pricing was difficult to assess given that different market players were moving the convertible paper down on different deltas.
"Some people are moving them down on a 90% delta and some are moving them down on a 70% delta," the New York-based sellside trader said.
The credit default swap rates of the companies also widened out on the MGIC miss.
"Across the board, the CDS on all these guys are around 30 basis points to 50 bps wider," a second New York-based sellsider said.
Apollo to price
New York-based closed-end investment company Apollo Investment planned to price $150 million of senior convertible notes before the market open on Thursday that were talked to yield 5.75%, with an initial conversion premium of 17.5%.
The Rule 144A offering has a greenshoe of $22.5 million and was being sold via Morgan Stanley & Co. Inc. and RBC Capital Markets.
Proceeds will be used to fund new portfolio investments, to reduce outstanding borrowings and/or commitments on the company's revolving credit facility and for general corporate purposes.
Mentioned in this article:
Apollo Investment Corp. Nasdaq: AINV
Ares Capital Corp. Nasdaq: ARCC
MGIC Investment Corp. Nasdaq: MGIC
PMI Group Inc. NYSE: PMI
Radian Group Corp. NYSE: RDN
| Symantec Corp: | Nasdaq: SYMC
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