American Realty sells $300 million convertibles after talk revised; Peabody trades better

By Rebecca Melvin

New York, July 23 - American Realty Capital Properties Inc. sold $300 million of five-year convertible senior notes on Tuesday after price talk was revised wider, or toward cheaper terms, during marketing, market players said.

Sources said the terms were revised to a set 3% coupon and 15% initial conversion premium, which was better for investors compared to initial talk of a 2.5% to 3% coupon and a 20% to 25% premium.

The convertibles were priced via J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Barclays, BMO Capital Markets and KeyBanc Capital Markets. There is a $30 million greenshoe.

Prior to the changes, the planned deal looked rich at the cheap end of talk, one trader said.

Elsewhere, Peabody Energy Corp.'s convertibles traded better with the stock higher after the St. Louis-based coal company reported lower quarterly profit that was better than expected. Peabody shares had been higher by more than $1.00 but pared gains to end higher by $0.82 per share, or 5%.

MGIC Investment Corp.'s convertibles traded better on a dollar-neutral basis after the underlying shares of the Milwaukee-based mortgage insurer jumped 10% on an unexpected profit for the company's second quarter.

Overall, there "was not a ton of activity in earnings names; it's been really quiet this summer," a New York-based convertibles analyst said.

He said that traders would be watching the earnings report of Apple Inc. after the market close Tuesday for the report's "broader implication," even though the tech giant is not a convertible issuer.

Elsewhere, USEC Inc. was still being eyed, although the convertibles never did trade actively on the shares for the Bethesda, Md.-based enriched uranium producer over the last couple of days.

The USEC bonds didn't really move, an analyst said, although they got up to about 29 to 30 from about 26. "They didn't trade in size," he said, indicating that the bonds were trading in smaller, odd lots, and because the company is so small and its market capitalization went up only to $60 million from $30 million with the stock increase.

"So it wasn't that significant in the grand scheme of things," the analyst said.

American Realty reprices

American Realty Capital's deal looked cheap by about 1.75 points after talk was revised to a 3% coupon and a 15% initial conversion premium and using a credit spread of 300 basis points over Libor and a 22% vol., a Connecticut-based trader said.

Using the same inputs with the initial talk of 2.5% to 3% yield and 20% to 25% premium, the deal looked about 99.5 at the cheap end of the talked range, the trader said.

The convertibles trader had initially considered a wider spread in the 400 bps range but stuck with the tighter spread because he felt it was merited. The real estate investment trust is a "transformational company," due to its numerous acquisitions, he said. "They are getting a handle on the credit, their tenants are higher-grade, bigger companies and more investment grade. In the last six months, the company has completely transformed itself," he said.

The deal was valued with a regular weight borrow.

"Guys didn't like it at the previous pricing, but here it gets interesting," he said.

The notes have contingent conversion if shares exceed 130% of the conversion price. They are non-callable with no puts and have takeover protection.

Proceeds will be used to repay debt under its existing senior secured revolving credit facility and for other general corporate purposes, including investing in properties in accordance with investment objectives.

American Realty is a New York-based real estate investment company.

Peabody adds after earnings

Peabody's 4.75% convertibles due 2066 traded last at about 74.75 with the stock at $17.35, which was a little better, a Connecticut-based trader said.

Shares of the St. Louis-based coal miner jumped by $1.02, or 6%, to $17.32 during the session but drifted back, ending up just $0.82, or 5%, at $17.15.

On Friday, the convertibles had traded at 71.75, 72.125 and 75.125, according to Trace data.

The company reported earnings that were a little better than expected and investors are getting a little more comfortable with the company's prospects, the trader said.

"BTU reported, and people had been thinking the worst," he said.

"This is a little better with the stock up", he said about the convertible.

Peabody reported net income of 33 cents a share compared with a profit of 78 cents a year earlier. That compared with analysts' estimates for a 5-cent loss.

Sales fell 13% to $1.73 billion from $1.98 billion, which was below estimates for $1.81 billion of sales.

The company's outlook was in line with estimates, and the company is expecting better demand with the hot summer underway and higher natural gas prices curbing natural gas-fired power generation.

"Despite a slow start to summer, U.S. coal generation is up significantly year to date and natural gas generation has declined sharply," Peabody chief executive Gregory H. Boyce said in the company's earnings release.

"Combined with reduced coal production, U.S. coal inventories are expected to improve to their lowest levels in several years with Powder River Basin stockpiles leading the decline," Boyce said.

Peabody is targeting third-quarter 2013 adjusted EBITDA of $210 million to $270 million and adjusted diluted earnings per share of between negative $0.16 to positive $0.09.

Adjusted EBITDA targets reflect expected seasonal increases in U.S. volumes, carryover geologic issues in Australia and lower coal pricing.

MGIC expands dollar neutral

MGIC's 2% convertibles were seen in trade at 130.70 versus an underlying share price of $7.40, which was up about a point on a dollar-neutral basis, if the bond was held on a delta of 75% to 80%, a New York-based convertibles analyst said.

Shares gained 68 cents, or 10%, to $7.35.

The company beat estimates on earnings and met expectations on revenue.

MGIC reported earnings of $12.4 million, or 4 cents per share, compared to a loss of $273.9 million, or $1.26 per share, in the year-earlier period.

Analysts expected a loss of 15 cents per share.

Revenue fell 18% to $263.9 million from $321.1 million. Analysts expected revenue of $267.3 million. The company said that the year-earlier period included a $17.8 million gain related to buying back debt.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

MGIC Investment Corp. NYSE: MTG

Peabody Energy Corp. NYSE: BTU

USEC Inc. NYSE: USU

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