AOL sees strong debut; planned Priceline seen rich; existing Priceline under pressure

By Rebecca Melvin

New York, Aug. 14 – AOL Inc.’s newly priced 0.75% convertibles jumped out of the chute Thursday and remained strong throughout the session even though the underlying shares pulled back some in afternoon trading.

The new AOL bonds were seen at about 103.5 at the close and were better on a dollar-neutral, or hedged, basis by 3 points, market sources said.

AOL’s strong performance contrasted with expectations for Priceline Group Inc.’s planned offering of up to $1 billion of seven-year convertible senior notes, which was seen pricing after the market close.

The new Priceline deal was talked to price at a discount to par of 99 to 99.25, and one source thought pricing would have to come at an even lower level.

In the gray market ahead of final terms being fixed, the planned Priceline deal traded at 99.75, and they were later seen at 98.25 bid, 99 offered in the gray market.

The planned Priceline deal was putting pressure on Priceline’s existing convertibles, which were seen to have contracted on hedge by about a point on Wednesday and by another 2 points on Thursday.

But the new Priceline deal, despite its bulk, wasn’t thought to be putting pressure on the convertibles market overall.

“It didn’t seem to have that much of an effect on the market,” a New York-based trader said of the Priceline deal. “It’s been feeling heavy recently, but it didn’t feel that heavy today.”

Fellow travel-services provider Ctrip.com International Ltd. of Shanghai saw its 1.25% convertibles trade in size at the market close, at 113.0625 versus a share price of $66.35, a New York-based trader said. Shares of the China travel site were off about 50 cents, or 0.8%.

The trade appeared to be unrelated to the Priceline activity and involved an outright buyer and hedged sellers, the trader said.

New AOL gains on debut

AOL’s newly priced 0.75% convertibles traded up at 103 bid, 104 offered for most of the session and were said to have gained 3 points on a hedged basis after the New York-based digital brands, products and services company priced an upsized $330 million of the five-year convertible senior notes toward the rich end of 0.625% to 1.125% coupon talk and at the midpoint of 32.5% to 37.5% premium talk.

“On swap it was up 3 points,” a trading source said.

The AOL deal, which was initially talked at $300 million in size, traded at 103 bid, 104 offered at the market open, the trading source said. At the end of the session it was quoted at the “mid 103 level,” given that the stock was giving back some of its gains.

The deal’s strong performance was particularly notable because most recent new issues have not been performing that well in first-day trading.

“It’s definitely an outlier” in that respect, the trader said.

Its success may be attributable to the deal’s smaller size from a brand name company, which fostered a desire to own from institutional investors, the trader said. “And it was not pushed aggressively in terms of pricing. So ultimately, the underwriters priced something that retained some cheapness.”

There is a $49.5 million greenshoe, which was upsized from $45 million. Joint bookrunners were Goldman Sachs & Co. and J.P. Morgan Securities LLC.

The notes are non-callable with no puts. They have takeover and dividend protection and net share settlement.

In connection with the offering of notes, AOL entered into privately negotiated convertible note hedge and warrant transactions, or a call spread. The strike on the warrants is $84.92, which boosts the initial conversion premium from the issuer’s perspective to 100%.

About $31.8 million of the proceeds from the offering will be used to fund the net cost of the call spread, about $40 million of proceeds will fund common stock repurchases, and remaining proceeds will be used for general corporate purposes, which may include share repurchases, acquisitions, and other strategic transactions and working capital.

The stock repurchases are part of AOL’s previously announced $150 million share repurchase program.

New York-based AOL is a digital brands, products and services company.

Planned Priceline seen rich

Priceline’s planned issue of $1 billion of seven-year convertibles was seen a bit rich even with a discount to par expected to be baked into the deal. Although one source said that given the discount, the deal looked about fair.

The range for the reoffer was seen at 99 to 99.25. But one trader thought it might be an even greater discount.

Using a credit spread of 100 basis points over Libor and 27% vol., the deal looked about 95.82, assuming the cheap end of the coupon range, or 0.9%, with an initial conversion premium of 60%.

They were said to have traded in the gray market between 97.75 and 99.

“Some guys will buy it, but to clear $1 billion with a repeat buyer is going to require more of a discount,” a trader said.

The deal, he opined, appeared to be more of an attempt to do a large deal rather than one to make money.

The new deal seemed to weigh on Priceline’s existing convertibles as well.

Priceline’s 1% convertibles due 2018 were seen at 146.77, which was down nearly a point, according to Trace data.

Priceline’s 0.35% convertibles due 2020 traded at 120 early Thursday, a syndicate source said. That represented a 1.5- to 2-point drop.

The Priceline 1.25% convertibles due 2015 were not heard in trade.

The three existing convertibles were said to have lost about 2 points on swap on Thursday on top of a one-point loss on Wednesday.

Priceline launched the offering after the market close Wednesday with 0.75% to 0.9% coupon talk and a fixed 60% initial conversion premium.

The Rule 144A deal has a $150 million greenshoe and was being sold via Citigroup Global Markets Inc. and Wells Fargo Securities LLC.

The notes will be non-callable for life, with dividend and takeover protection. The bond matures Sept. 15, 2021.

Proceeds are expected to be used to repurchase common stock and for general corporate purposes.

Priceline is a Norwalk, Conn.-based online travel agency.

Mentioned in this article:

AOL Inc. NYSE: AOL

Ctrip.com International Inc. Nasdaq: CTRP

Priceline Group Ltd. Nasdaq: PCLN

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