Carriage Services adds on hedge; Leap in action after change of control; Tesla active

By Rebecca Melvin

New York, March 14 - Carriage Services, Inc.'s newly priced 2.75% convertibles traded modestly higher on both an outright and dollar-neutral, or hedged, basis Friday after the Houston-based funeral home and cemetery operator priced $125 million of the seven-year notes at the rich end of talked terms, market sources said.

The Carriage Services bonds were last heard at 100.875 bid, 101.375 offered with the underlying shares at $17.05. That represented a dollar-neutral expansion of about 0.75 point to a point, assuming a delta of 65%, according to a syndicate source. Some market players were on a higher delta of 70% to 72%, one trader noted.

Elsewhere, the convertibles of Leap Wireless International Inc. were in focus after AT&T Inc.'s $1.2 billion takeover of the San Diego-based digital wireless services provider closed late Thursday. Leap notified holders of the 4.5% convertible senior notes due 2014 of a make-whole fundamental change, and those bonds were seen trading at 101.10 bid, 101.20 offered, which was up a bit from 100.9 bid, 101 offered previously, a New York-based trader said.

Otherwise, the convertibles market was fairly quiet in the absence of a ton of new paper, and traders went back to Priceline.com Inc., which saw its 1% convertibles atop the Trace volume chart in what was likely a continuation of the trend to rotate out of the 1% issue in favor of the newer Priceline 0.35% convertibles, which have a lower delta.

Tesla Motors Inc.'s three sister convertibles were also trading, with all three lower, including the Tesla 1.25% convertibles due 2012, which were down more than a point at 94.625, according to Trace data. Tesla shares were down 3%.

Cemex SAB de CV was another more actively traded name, with the Cemex 3.75% convertibles due 2018 changing hands late in the session down 3 points outright at 139.596, according to Trace data, and the Cemex 3.25% convertibles due 2016 traded down 3.5 points to 133.034. Shares of the Monterrey, Mexico-based cement producer ended down 2%.

Overall the convertibles market saw light volume again on Friday. The trend this week has been for market players to trade the new deals and not much else, a trader noted.

Volatility up

But the pickup in volatility in the broader markets should have a positive impact on convertibles, he added. "The volatility is going to help us," the trader said.

The CBOE volatility index rose 1.53 points, or 9%, to 17.75 on Friday. The index had spiked since early Thursday from about 14, which is right around where it had been trending since the middle of February.

In the broader markets, stocks alternated between gains and losses for much of the session but ended lower for the day and for the week amid a more defensive tone and concerns over Russia and the Ukraine situation as a referendum in Crimea regarding control of that region loomed.

Meanwhile, U.S. economic data came in weaker than expected. Consumer sentiment declined to 79.9 in early March, which was down from 81.6 in the prior month, according to a preliminary Thomson Reuters/University of Michigan index. The latest reading was the lowest since November.

In addition, the Producer Price Index dropped 0.1% in February, the Labor Department said, which was its first decline since November. Excluding volatile food and energy prices, core prices ticked up 0.1%.

The S&P 500 stock index fell 5.21 points, or 0.3%, to 1,841.13. For the week, the index is down nearly 2%. The Dow Jones industrial average fell 43.22 points to 16,065.67, on top of a 231-point slump on Thursday, and the Nasdaq stock market fell 15.02 points, or 0.4%, to 4,245.40.

Carriage Services adds

Carriage Services' newly priced 2.75% convertibles due 2021 traded last at 100.875 bid, 101.375 offered with the underlying shares at $17.05, a syndicate source said. That represented a dollar-neutral expansion of about 0.75 point to a point, assuming a delta of 65%.

A second source said the delta on the bond would have been higher in many cases at 70% to 72%.

Carriage Services shares ended up a dime, or 0.6%, to $17.13. On Thursday shares slid 9%.

The shares fell in the early going Friday, and the bonds were called 99.5 bid, 100 offered when shares were lower, but by late morning the bonds were seen at 100 bid.

The slightly upsized $125 million deal was allocated mostly to outright investors.

The new notes came with a 2.75% coupon and a 32.5% initial conversion premium.

The issue size was increased from $120 million, and the greenshoe was increased to $18.75 million from $18 million.

BofA Merrill Lynch was the bookrunner for the Rule 144A deal with co-lead manager Raymond James Financial Inc. The co-managers were Barrington Research and Regions Securities LLC.

Before Dec. 15, 2020, the notes will be convertible only if certain events occur and only during certain periods.

The bonds are hard-call protected for seven years, with no puts. There is net share settlement and contingent conversion if shares exceed 130% of the conversion price, according to the market source.

There is also dividend protection via a conversion ratio adjustment above a quarterly threshold of $0.025, and there is change-of-control protection in the form of a make-whole adjustment premium delivered upon conversion as incremental shares.

Proceeds will be used to redeem or repurchase the company's convertible junior subordinated debentures (or the corresponding trust preferred securities) or any shares of common stock issued upon conversion of such debentures and to repay amounts outstanding under its credit facility.

Mentioned in this article:

Carriage Services Inc. NYSE: CSV

Cemex SAB de CV NYSE: CX

Leap Wireless International Inc. Nasdaq: LEAP

Priceline.com Inc. Nasdaq: PCLN

Tesla Motors Inc. Nasdaq: TSLA

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