No big jump for Leap; Merrimack extends gains; Ares Capital on tap again; Forest City to price

By Rebecca Melvin

New York, July 15 - Leap Wireless International Inc.'s convertible bonds traded up a couple of points to 102.5 bid, 103.5 offered on Monday after news that AT&T Inc. agreed to buy the San Diego-based wireless service provider for $1.2 billion or $15 a share in cash, which represented a 88% premium to Leap's last closing share price.

But the gain in the Leap convertibles, which mature in one year and were already trading above par, in no way compared to Leap shares, which more than doubled in Monday's action.

Merrimack Pharmaceuticals Inc.'s 4.5% convertibles, which debuted in the secondary market on Friday, extended their initial gains on an outright and dollar-neutral, or hedged, basis after the Cambridge, Mass.-based biopharmaceutical company priced $125 million of the seven-year convertible senior notes.

Merrimack's 4.5% convertibles due 2020 traded at 104.75 bid, 105.75 offered versus an underlying share price of $5.05 on Monday, which was about 1.25 points better dollar neutral, compared with 103 bid, 104 offered versus the underlying share price at $5.06 at the end of Friday.

In primary market action, two new issues launched early Monday: Ares Capital Corp., a serial issuer of convertibles, launched its fifth convert issue with a $250 million offering of 5.5-year convertibles talked at a 1% discount to par, a 4.125% to 4.375% coupon and a 15% premium; and Forest City Enterprises Inc. announced a $250 million offering of seven-year convertibles talked to yield 3.375% to 3.875% and with an initial conversion premium of 32.5% to 37.5%.

Forest City has three existing issues outstanding, but only one is of significant size, its $315 million of existing 4.25% convertibles. There is also an outstanding $50 million of Forest City 5% convertibles and $61 million of Forest City 3.625% convertibles outstanding. None of the existing issues was heard in trade. Neither was there notable trading in Ares Capital's existing issues, sources said.

"I didn't see it back up at all," an East Coast-based analyst said of the Ares convertibles.

"They are not cheapening; and in terms of adding another couple hundred million dollars of a BDC, I don't think it really matters," the analyst said, referring to business development corporations.

Despite all of the Ares Capital paper in the market, and even more in the business development space, the deal was seen as meeting with enthusiasm due to the company's high credit rating and the income value that such paper represents, a New York-based convertibles analyst said. Even so with a talked coupon at 4.25% at the midpoint, the new Ares convertible looks like it will be the lowest coupon of the series. The coupons on the other four issues range from 4.75% to 5.75%.

Leap adds 2 points

Leap's 4.5% convertible senior notes due 2014 traded at 102.95 during the session, and were seen at 102.5 bid 103.5 offered on Monday afternoon. That was about a 2 point gain from 100.5 bid, 101.5 offered previously, a New York-based convertibles analyst said.

The convertibles have a 0% delta, and trade strictly on an outright basis, the analyst said.

The Leap 4.5% convertibles, of which about $230 million remain outstanding, were priced originally in 2008 with a $93 conversion price.

The company attempted to tender for this issue in April, but was unsuccessful because the deal traded above the tender price, which was for $1,005 in cash for each $1,000 in principal value of notes plus interest.

Leap shares were last trading at $7.98 before the AT&T takeout news. After the news, the shares surged $9.08, or 114%, to $17.06. But that still remained outside of striking distance to the conversion price.

AT&T has agreed to pay $1.2 billion to buy Leap Wireless and the transaction represents yet another example of small U.S. carriers merging with telecom majors this year. T-Mobile US Inc. merged with MetroPCS Communications Inc. in May and Japan's SoftBank Corp. agreed to buy Sprint Nextel Corp. this month.

Leap is the fifth-largest U.S. wireless carrier and has 5.3 million customers compared with 77.8 million for AT&T, which is the No 2 U.S. carrier behind Verizon Wireless, as No. 1.

The Leap deal is expected to take six to nine months to complete.

Ares seen fair to cheap

Ares Capital's new deal was seen fair value to somewhat cheap. The company is considered a serial issuer, which it should be, a Northeast-based analyst said. "It's a good source of capital for them. And they are one of the best BDC players out there, the best in class."

As far as the deal, the analyst saw it as a "little bit cheap, but nothing to write home about."

As for the issuer: "They are very good, and have done very well managing their business over the last couple of quarters and the last couple of years. Whether the convert market needs another BDC issue is debatable, but if it fits a need, it makes sense," the analyst said.

He said a credit spread of 350 basis points to 400 bps over Libor was reasonable and added that volatility is 15% to 20%.

A second source said credit for Ares convertibles is 300 bps to 400 bps depending on the maturity.

The company plans to price $250 million of 5.5-year convertible senior notes at a discount to par of 99 that were talked at a coupon of 4.125% to 4.375% and a fixed initial conversion premium of 15%.

Ares Capital shares were little changed after the launch and ended the day down nine cents, or 0.5% at $17.53.

The Rule 144A offering has a $37.5 million overallotment option and was being sold via joint active bookrunners BofA Merrill Lynch, Morgan Stanley & Co. Inc. and Wells Fargo Securities LLC and joint passive bookrunner Deutsche Bank Securities Inc.

The bonds are non-callable for life and will mature on Jan. 15, 2019.

Proceeds will be used to repay or repurchase debt including borrowings under its revolving credit facility, and for other general corporate purposes, which include investing in portfolio companies.

Ares is a New York-based private equity firm.

Fitch Ratings said it expects to rate the news convertibles BBB based on the fact that the sale isn't expected to have a "material impact on the company's leverage levels" since proceeds will largely be used to repay borrowings on secured credit facilities.

Ares Capital's existing 4.75% convertibles due 2018 were not heard in trade. Its 4.875% convertibles due 2017, 5.125% convertibles due 2016, and 5.75% convertibles due 2016 were also quiet.

Forest City seen cheap

Forest City's planned $250 million of seven-year convertibles was seen 2 points to 3.75 points cheap, according to sources.

Using a credit spread of 400 bps over Libor and a 25% volatility put the paper at 102.5 at the midpoint of talk.

A narrower credit of 375 bps over Libor and 24% volatility made the paper about 3 points cheap at the midpoint of talk.

One source said he would go wider on the credit spread for a seven-year piece of paper.

Forest City was expected to price its deal after the market close with a 3.375% to 3.875% yield and a 32.5% to 37.5% initial conversion premium.

A New York-based trader noted that based on a stock price of $18.00, the premium range puts the strike at about $24.30 - a level at which it hasn't been since October 2008.

The Rule 144A deal has a $50 million overallotment option and was being priced via bookrunners BofA Merrill Lynch, Barclays, Citigroup Capital Markets Inc., Goldman Sachs & Co. and Morgan Stanley & Co. Inc.

The notes are freely convertible. They are provisionally callable for five years until Aug. 15, 2018 at par plus interest subject to shares being at least 130% of the conversion price, and then feely callable after that.

Proceeds are earmarked to repay the balance of its 6.5% senior notes due 2017 and other outstanding debt.

Proceeds will be held in an escrow account and invested in short-term, investment-grade, interest-bearing securities, pending their application.

Forest City is a Cleveland-based real estate developer with $10.6 billion in assets.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Forest City Enterprises Inc. NYSE: FCE-A

Leap Wireless International Inc. Nasdaq: LEAP

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

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