Apollo pulls planned deal; MGM moves down in line to weaker; market players eye earnings

By Rebecca Melvin

New York, April 26 - Apollo Investment Corp. announced late in the session Tuesday that it was postponing a planned $200 million offering of six-year convertibles, which had been expected to price after the market close.

Apollo didn't say why the deal was being pulled, but market sources suggested that investors may have reached their saturation point for paper from the business development company sector of which Apollo is a part.

"I wouldn't read too much into this; this is very specific to the space, and not even so much about the company. The company is fine," a New York-based syndicate source said.

There have been at least five deals from these finance companies in the last three months. The issuers include Prospect Capital Corp., Ares Capital Corp., Fifth Street Finance Corp. and Hercules Technology Growth Capital Inc.

Also Apollo tapped the convertible market previously with a $200 million deal of 5.75% convertibles in January.

In general, the convertibles of these companies were all down about 0.5 point to a point in reaction to the planned Apollo deal.

Elsewhere in the secondary market, action was muted, and even earnings news wasn't sparking much volume.

Ford Motor Co.'s earnings release was closely watched early Tuesday and even though Ford has only warrants outstanding and no convertibles currently, market players were interested because of what Ford's earnings might predict about the results of General Motors Co., which has a large mandatory convertible bond in the market.

The GM mandatories gyrated in early trade and ended higher by 34 cents, or 0.7%, at 48.80.

United States Steep Corp. also reported earnings, and those convertibles were said to have traded at 172.25 versus a share price of $56.50.

MGM Resorts International was down in line to somewhat weaker on a dollar-neutral basis as the underlying shares underperformed the broader equity markets after a downgrade by Credit Suisse to "under-perform" from "neutral." Credit Suisse also dropped its price target for shares of the Las Vegas-based casino owner and operator.

Toward the end of the session, there was also a Barron's article published about MGM that may have contributed to the trading action, a New York-based sellside analyst said.

Overall, the session was called "pretty quiet." Nevertheless, there is focus this week, which is heavy on earnings news and which includes the meeting of the Federal Open Market Committee, which is expected to end with an historic press conference in which Federal Reserve chairman Ben Bernanke will field questions.

"It's going to be interesting tomorrow, the bond markets are going to react. There's a lot of data out this week, and it will be an interesting week, if not a lot of volume," a New York-based sellside analyst said.

Apollo pulls deal

"Sometimes when there is a wave of issuance from new sectors, the buyer base gets kind of tapped out," a New York-based sellsider said.

Business development companies such as Apollo have not traditionally come to the convertibles market for capital, but in recent months many have, he said.

Nevertheless, the fact that the Apollo deal was pulled when up to this point demand has been so strong was surprising.

"It's rare to have deals get pulled," he said.

Perhaps investors didn't like the structure, which includes a contingent conversion feature, which means that investors can't convert out of the bonds into shares unless the price of the underlying shares is at a specific premium over the current stock market price; in this case the premium was 130%.

"If the premium collapses and you want to get out it, you can't convert early," the sellsider said.

Typically however there are things that can be adjusted to get the deal done. In Apollo's previous deal the issue price was discounted to 98.5 from par.

Part of the problem here was that there was an unwillingness to alter the terms, he said, noting that the Prospect deal didn't have the contingent conversion feature.

MGM slips dollar neutral

MGM's 4.25% convertibles due 2015 traded at 106 versus an underlying share price of $13.00 on Tuesday, which compared to 107.25 versus a share price of $13.39 on Monday, according to a New York-based sellside desk analyst, who said that the pricing was about 0.75 point wider with the stock down 34 cents, meaning that the conversion premium was bigger.

MGM shares ended down 32 cents, or 2.4%, at $13.02 on Tuesday.

"If you're at the theoretical delta, which is a 60, it would look like the bonds were trading in a little bit," a New York-based sellside trader said.

Mentioned in this article:

Apollo Investment Corp. Nasdaq: AINV

Ares Capital Corp. Nasdaq: ARCC

Fifth Street Finance Corp. NYSE: FSC

General Motors Co. NYSE: GM

General Motors Co. series B NYSE: GM-PB

Hercules Technology Growth Capital Inc. Nasdaq: HTGC

MGM Resorts International NYSE: MGM

Prospect Capital Corp. Nasdaq: PSEC

United States Steel Corp. NYSE: X

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