New Ares Capital flat after pricing at discount; WellPoint gains; NuVasive loses on hedge

By Rebecca Melvin

New York, Oct. 4 - Ares Capital Corp.'s newly priced 4.75% convertibles, which priced at a discount of 99.25, traded mostly flat to up just slightly on their debut in the secondary market Thursday after pricing at the cheap end of talk late Wednesday.

The older Ares convertibles were called weaker, with the Ares 5.125% convertibles due 2016 said to have traded at 104.875 near the close, which was down 0.125 point on the day, while Ares shares added 1.6%.

WellPoint Inc.'s 2.75% convertibles due 2042, which debuted Wednesday, continued to trade well, expanding another 0.5 point to 0.75 point on a dollar-neutral, or hedged, basis, depending on the delta.

NuVasive Inc.'s 2.75% convertibles due 2017 dropped outright and slipped 0.5 point or more on a hedged basis after the San Diego-based medical device maker issued a revenue warning late Wednesday that sent shares plunging 33% on Thursday.

Cemex SAB de CV's convertibles were active and improved on a hedged basis Thursday after the Monterrey, Mexico-based cement maker issued its first quarterly guidance in more than three years and forecasted higher EBITDA but lower revenue.

Cell Therapeutics Inc. launched an offering of $40 million of convertible preferreds, but the new paper of the Seattle-based biopharmaceutical company converts 30 days after issue and wasn't considered a true convertible, but just an alternative means of issuing stock, market players said.

There was some evidence of selling in the convertibles secondary market in the past few days especially in some of the in-the money names like BioMarin Pharmaceutical Inc., Cadence Design Systems Inc. and D.R. Horton Inc., a market source said.

He suggested that convertibles players were attempting to free up funds to buy new issues. But a second source said he really didn't see any notable selling.

In the new issue market, market players commented that the Ares Capital convertibles "got done below par" possibly because the pricing that WellPoint achieved was misleading.

For the Ares deal, "they went out with really tight price talk. People are dying for investment-grade paper, and maybe they looked at what WellPoint did and thought they could get away with that," a New York-based trader said.

Ares flattish to up slightly

Ares' newly priced 4.75% convertibles due 2018 traded last at about 99.375 versus an underlying price of $17.19, after the $200 million issue came at a discount to par of 99.25.

Shares of the New York-based private equity firm added 27 cents, or 1.6%, to $17.18 in less-than-average volume.

"The stock was up a touch, and the bonds are up a small amount dollar neutral," a syndicate source said.

The company's older convertibles were said to be a little weaker, with the Ares 5.125% convertibles due 2016 having traded at 104.875 late Thursday, or down 0.125 point.

The older 4.875% convertibles due 2017 and the 5.75% convertibles due 2016 were not heard in trade.

"They just seem to use the convert market to raise money and then lend it out again at [higher rates,]" a New York-based trader said.

The Rule 144A offering, which has a $30 million over-allotment option, priced at the cheap end of talk, which was for a 4.25% to 4.75% coupon and a 17.5% to 22.5% initial conversion premium.

Joint bookrunners were J.P. Morgan Securities LLC and Goldman Sachs & Co., and the passive bookrunner was Deutsche Bank Securities Inc.

BMO Capital Markets Corp. and SunTrust Robinson Humphrey Inc. were the co-managers.

The notes will be non-callable with no puts. There is one-way dividend protection in the form of a conversion rate adjustment for dividends above $0.38, and there is change-of-control protection. Conversions can be settled in cash, stock or a combination.

Proceeds will be used to repay or repurchase debt and for general corporate purposes, including investing in portfolio companies in accordance with its investment objective.

WellPoint extends gains

WellPoint's new 2.75% convertibles added another 0.5 point on a hedged basis on a 70% delta early Thursday, according to one trader, and were up perhaps 0.75 point on hedge at the end of the day.

Shares of the Indianapolis-based health benefits company moved up smartly by $2.05, or 3.4%, to $62.16 in active trade.

WellPoint priced $1.35 billion of the new debentures after the market close Tuesday to yield 2.75% with an initial conversion premium of 25%.

The yield came in the middle of talk set at 2.5% to 3%, and the conversion premium was at the wide end of the 20% to 25% range.

The Rule 144A debenture has a $150 million over-allotment option and was sold via joint bookrunners Credit Suisse Securities (USA) LLC, Bank of America Merrill Lynch and UBS Investment Bank.

The notes are non-callable for 10 years and then provisionally callable if the underlying shares are 150% of the conversion price. There are no puts.

NuVasive slips on hedge

NuVasive's 2.75% convertibles due 2017 traded down to as low as 85 during the session, which was down from about 95 on Wednesday. Buyers stepped back in at the lower levels and the paper ended at about 86.75 bid, 87.25 offered versus the closing share price of $15.19.

Shares of the San Diego-based medical device maker plunged $7.43, or 33%, to $15.19 in ultra-heavy volume.

On a dollar-neutral, or hedged basis, the paper lost about 0.5 point if holders went into the day on a 50% delta, and the lighter the delta the heavier the loss, a New York-based trader said.

The bond now trades mostly outright, he said.

"The bonds were for sale early and then by late morning or early afternoon, they were better to buy and moved up about a point," the trader said.

It's difficult for the bond to hold in "when there is uncertainty like this and the stock is totally oversold," the trader said.

But he personally thought the move was overdone. The company preannounced a revenue shortfall of $6 million, or 3% of sales, he said.

"It didn't look that bad really," he said. But there was also chatter that key sales people were leaving the company, and there was uncertainty about how deep the problems are.

"People are also frustrated with the company," he said.

Sporting a 5.8% yield and 100% premium near the lows, the bond didn't look that bad, he said.

"It's a good yield, and if you believe that it's an isolated event, then it's relatively attractive," the trader said.

NuVasive, which focuses primarily on minimally disruptive surgical products for the spine, said that its third-quarter revenue will be less than expected due to high account churn and aggressive competition.

As previously reported, the company now expects third-quarter revenue of $147 million, which was below the company's previous guidance of revenue flat compared to $154.4 million in the second quarter.

"We experienced an unexpected sequential decline in the third quarter due to unusually high account churn related primarily to the growth of surgeon participation in physician-owned distributorships and to increasingly aggressive competitive tactics. As well, we heard from many surgeon customers of increased delays and denials from insurance payers. We believe our ability to take market share with innovative procedural solutions and services remains strong," NuVasive chairman and chief executive Alex Lukianov said in a news release.

NuVasive expects to announce full quarterly revenue and earnings and update guidance when the company releases earnings Oct. 29.

Cemex better in active trade

Cemex's 4.875% convertibles due 2015 traded up to 104.5 versus an underlying share price of $9.00, a Connecticut-based trader said.

Cemex shares gained 41 cents, or 4.8%, to $8.97 on Thursday.

The cement company said that it expects third-quarter EBITDA to rise 9% from a year earlier but expects revenue to decline 2% for the third quarter ended Sept. 30.

The company last provided guidance in February 2009.

The disclosure of preliminary financial information was related to its proposed private placement of debt securities, the company said in a news release.

The company also said it expects that its total debt, including the convertible notes and capital leases, plus perpetual notes, will remain relatively flat compared to the balance reported June 30, 2012.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Cadence Design Systems Inc. Nasdaq: CDNS

Cell Therapeutics Inc. NYSE: CTI

Cemex SAB de CV NYSE: ADS: CX

D.R. Horton Inc. NYSE: DHI

NuVasive Inc. Nasdaq: NUVA

WellPoint Inc. NYSE: WLP

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