Fifth Street intends to price $150 million notes; Amerigroup, SM Energy paper cheapening

By Rebecca Melvin

New York, April 6 - Fifth Street Finance Corp. came to market with the first deal of the week late Wednesday with a $150 million overnight offering of five-year convertible senior notes that was seen pricing ahead of the open Thursday.

The White Plains, N.Y.-based business development company is selling the notes in a private Rule 144A offering that was talked to yield 4.875% to 5.375% with a 10% to 15% initial conversion premium, according to a syndicate source.

Comparable credits for this new paper include Ares Capital Corp., which priced $500 million of 5.75% five-year convertibles with a 17.5% initial conversion premium in January, and Prospect Capital Corp., which priced two deals within a tight, two-month period, including $150 million 5.5% 5.5-year convertibles with a 10% premium in mid February and also $150 million of 6.5% five-year convertible with a premium of 10% priced in mid December.

The low premium, especially marketed as an overnight deal, was viewed as a positive for the deal, according to a New York-based sellside trader.

Otherwise the session was described as lackluster, with no real names stepping forward as market focuses.

"As I look at the most active names, there are a lot of benchmark-y names or a few things around the edges, but nothing of note," the sellside trader said.

Other traders echoed the sentiment.

"It's deadly [quiet]," a second New York-based sellside trader said.

There was some sector rotation going on during the session, one trader noted, with money coming out of managed care. That could have prompted some action in Amerigroup Corp., which came in along with other shorter-duration names trading on delta last week and weren't regaining traction this week.

"A bunch of that traded, mostly outright and mostly sellers," a New York-based sellside trader said, suggesting that outrights were taking money off the table in managed care.

A second trader said that it looked perhaps like an investor was swapping out of Amerigroup into Charles Rivers Labs International Inc. "But I don't know that for certain," he said.

Charles River was higher at 107 plus along with higher shares, compared to 105.75 bid, 106 offered versus a share price of $40.05 on Tuesday.

SM Energy Co., formerly known as St. Mary Land & Exploration Co., was also seeing some action as its underlying shares took a hit.

"St. Marys took a hit, outsized for its group but not hugely so. A lot of other E&P names were down. And that might explain why an outright was adding on the dip," a New York-based sellsider said, referring to other exploration and production companies.

New issues mostly quiet

Other than Fifth Street's $150 million offering that came after the close, the convertible market has seen no other new issuance this week, contrary to pretty solid action last week.

Market players were not all that concerned with the lull and in fact were pretty sanguine about it given that they don't really want to see a lot of issues ahead of the upcoming earnings season.

"You get a little concerned - and it's happened before - as you head into earnings that if issuers come in before they report, then you might get burned," a sellsider said.

"They squeeze a deal in there, and then cough up a lung in an earnings report a few weeks later," the sellsider said.

Fifth Street to price

Fifth Street launched an overnight offering of $150 million of five-year convertible senior notes that were seen pricing ahead of the open Thursday and talked at a coupon of 4.875% to 5.375% with a 10% to 15% initial conversion premium, according to a syndicate source.

The Rule 144A offering was being sold via J.P. Morgan Securities LLC, Morgan Stanley & Co. Inc. and Wells Fargo Securities LLC.

There is a $22.5 million greenshoe.

The notes are non-callable with no puts.

Proceeds will be used to reduce outstanding borrowings, to make investments in small and mid-sized companies and for general corporate purposes.

White Plains, N.Y.-based Fifth Street lends to and invests in small and mid-sized companies in connection with an investment by private equity sponsors.

Amerigroup, SM cheapening

Amerigroup's 2% convertible senior notes due 2012, which have been coming in this past week, were at about 2 points above parity on Wednesday, traded at 155.75 with stock dropping to $62.92.

There wasn't a lot trading, sources said.

Shares of the Virginia Beach, Va.-based managed care group fell Wednesday by $2.92, or 4.4%, to $62.92 in heavier-than-average volume.

The stock has had quite a run up in recent weeks, gaining about 15% for March. Standard & Poor's upgraded its credit rating on Amerigroup last week to BB+ and said the outlook was stable.

"Some of these stocks are lower today; I don't know a reason for it other than some of these stocks have had tremendous runs," a sellsider said.

SM Energy's shares were also lower Wednesday.

As for the convertibles, "both have come in," a sellsider said about Amerigroup and SM.

Both are deep in the money.

"As the stock comes up, should hold a little bit, but the delta has been moving around," the sellsider said of Amerigroup.

"They are low-premium names now; short dated, and we could see something like that coming in," a second sellsider said of Amerigroup and SM.

"SM came in a little bit today. They are pretty short dated, and I think they'll get called away," he said.

The last prints on SM were 143.157 and 144.319 versus a share price of $74.41 in afternoon trading.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

Ares Capital Corp. Nasdaq: ARCC

Charles River Labs International Inc. NYSE: CRL

Fifth Street Finance Corp. NYSE: FSC

Prospect Capital Corp. Nasdaq: PSEC

SM Energy Corp. NYSE: SM

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