Planned Gogo convertible looks cheap but lacks stock borrow; Goodrich remains strong

By Rebecca Melvin

New York, March 3 – Convertibles players eyed a new deal from Gogo Inc. on Tuesday that was seen pricing after the market close and considered cheap from an investor’s perspective. The deal, however, wasn’t generating widespread interest due to limited stock borrow, market sources said.

Gogo’s $300 million deal of five-year convertible senior notes was pricing together with a stock borrow facility that would be used primarily by the deal’s underwriters and affiliates.

Itasca, Ill.-based Gogo is an in-flight internet and entertainment provider.

Back in established issues, trading remained rather anemic, sources said, as a lowered level of new issuance – other than mandatories – and a good number of maturing issues have kept sellers out of the market, a New York-based trader said.

“At some point, they’ll have enough paper and sell some; but right now they have plenty of space,” the trader said of convertible portfolios.

A second New York-based trader said that the recent new mandatory convertibles, namely Actavis plc’s and American Tower Corp.’s mandatories, which both have a 5.5% dividend, remained in demand and pricing was firm. “They were “mostly better to buy,” he said.

Energy names remain an interesting play in the market as stabilizing oil prices leave market players wondering where pricing will go next.

Cheap oil pulled several distressed convertible names down into the 20s context from the 40s, and they have subsequently made a round trip back to 40, while some have pushed higher in the last couple of days.

Goodrich Petroleum Corp.’s 5% convertibles have jumped to 59 bid, 60 offered from about 43 in the last three sessions. Shares of the Houston-based oil and gas exploration and production company remained weak for a second straight day, but the bonds remained stronger.

Energy XXI (Bermuda) Ltd.’s 3% convertibles with a price tag of about 41 is one that market players are watching right now, as is Emerald Oil Inc.’s 2% convertibles.

“There was a 100% bounce off the bottom, and now a lot of guys are waiting to see what happens next,” a trader said.

Elsewhere, Liberty Media Corp.’s convertibles were seen trading at about 100.25. The underlying shares of the Englewood, Colo.-based media, internet and telecom company closed up $1.01, or 2.6%, at $40.28 on Tuesday.

The Liberty Media trade was an example of small-size, name-specific trading that was going on at pricing that was for the most part in line with moves in the underlying shares, a New York-based sellsider said.

Micron Technology Inc. saw its shares slide 5% to $29.66 after the Boise, Idaho-based semiconductor company got a ratings downgrade from Nomura Securities, which cut its rating on the stock to “neutral” from “buy” and price target to $30.00 from $40.00, citing concerns that the company is at risk of losing market share.

Micron has six series of convertibles outstanding, but the bonds weren’t mentioned as a feature of trade on Tuesday. However, the Micron 2.375% convertibles due 2032, which are in the triple par range, slipped to 314, which was down 10 points on the day, according to Trace data.

Gogo looks cheap

The new Gogo deal was seen more than 2 points cheap at the midpoint of talk, according to one Connecticut-based trader, who valued the deal using a credit spread of 900 basis points over Libor and a 35% vol.

The Gogo deal was talked at a 3.25% to 3.75% coupon and a 22.5% to 27.5% initial conversion premium.

The Gogo deal is a mid-size issue typically favored by convertible players, and there have been a limited number of these deals lately, as the market has been dominated by extra-large deals that are often mandatory convertibles and smaller deals of $100 million in size or less. Nevertheless, there wasn’t a lot of “noise” surrounding this deal, one trader said, because there is no stock borrow to speak of.

It is coming with a private prepaid forward stock agreement that provides a stock borrow for limited players.

“It models cheap, but it is subject to borrow availability,” a trader said.

Itasca, Ill.-based Gogo plans to price $300 million of five-year convertible senior notes after the market close on Tuesday.

The Rule 144A offering has a $45 million greenshoe and was being sold via bookrunners J.P. Morgan Securities LLC and BofA Merrill Lynch.

The notes are non-callable. They have contingent conversion prior to Dec. 1, 2019 under certain circumstances. They will be settled in shares of common stock, cash or a combination.

A portion of the net proceeds will be used to fund the cost of repurchasing stock under the forward stock purchase transactions. Remaining proceeds will be used for working capital and other general corporate purposes, including costs associated with developing next generation technology and possibly the acquisition of additional spectrum.

Goodrich remains up

Goodrich Petroleum’s 5% convertibles due 2032 were quoted at 59 bid, 60 offered at the end of Tuesday, holding on to gains notched since Friday.

The bonds have pushed up amid news of two separate cash raisings.

“For now it’s going to hold, but it may not hold after that,” a trader said, noting that it’s an interesting name with bonds and convertible preferred stock.

As for Emerald Oil, Energy XXI and others, “there’s some buying in anticipation of the companies doing something [with these issues] before maturity,” a trader said.

For Energy XXI, which is trading at 41, maybe the company will get out of the $123 million of 3% paper at $160 million or $170 million, the trader said.

Mentioned in this article:

Actavis plc NYSE: ACT

American Tower Corp. NYSE: AMT

Emerald Oil Inc. NYSE: EOX

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Gogo Inc. Nasdaq: GOGO

Goodrich Petroleum Corp. NYSE: GDP

Liberty Media Corp. Nasdaq: LMCA

Micron Technology Inc. NYSE: MU

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