Yahoo! slips on hedge after upsizing; WebMD weak after pricing at discount; secondary weak

By Rebecca Melvin

New York, Nov. 21 - Yahoo! Inc.'s newly priced 0% convertibles slipped Thursday on their debut in the secondary market after the Sunnyvale, Calif.-based internet search, content and communications company priced an upsized $1.25 billion of the five-year notes at the rich end of talked terms.

Yahoo!'s 0% notes slipped to 99 bid, 99.25 offered versus a share price of $35.62 and also traded above par at 100.375 bid, 100.5, sources said.

When shares were up better than 2%, the level was seen at about 99.75 bid, 100 offered versus a share price of $36.40.

With the shares up about 2.3% against the $35.62 share price at issue, the bonds were seen down on a dollar-neutral, or hedged, basis by 0.5 point to a point.

WebMD Health Corp.'s newly priced 1.5% convertibles, which priced at a discount to par of 97.5, traded weakly on their debut after Elmwood Park, N.J.-based provider of health information services brought $300 million of seven-year convertibles in an overnight deal at the fixed talked terms.

One trader said that he saw a bid on the WebMD convertibles at 97.5 on Thursday.

Also in the primary market, three small deals, which were expected to price after the market close, had down days in their stocks despite a rally in the broader equity markets.

Shares of Forestar Group Inc., which was expected to come with $135 million of tangible equity units, were down nearly $1.00, or 4.9%, at $19.10. American Residential Properties Inc.'s shares also lost about $1.00, or 5.6%, to $17.29 after the Scottsdale, Ariz.-based real estate investment trust launched a $100 million exchangeable deal, and GAIN Capital Holdings Inc. shares tumbled $1.78, or 16.7%, to $8.88 after the Bedminster, N.J.-based trading services provider announced a small $65 million deal of convertible senior notes.

The session's apparent over supply indigestion was not expected to be a long-lived problem. The convertible market could still absorb a significant amount of new paper, a New York-based trader said.

"It's been draining for five years," the trader said, referring to low issuance levels since the 2008 financial market collapse. The convertible market could handle significantly more than the approximately $40 billion in new issuance for the year to date, he said.

"It's about pricing, not demand," he said.

A lack of demand for the new Yahoo! deal was due to pricing that was not favorable to investors, sources said.

Back in established issues, pricing was said to be weak Thursday, especially in the technology sector, due to an abundance of supply with the new Yahoo! deal.

But equities were strong, boosted by positive economic data. U.S. jobless claims dropped by a stronger-then-expected 21,000 to 323,000 last week, the fewest since September, the Labor Department said. Economists had forecast a drop to 335,000.

Another report showed wholesale prices fell for a second month in October and the Philadelphia Fed's index of manufacturing in the region dropped to 6.5 in November, trailing the median economist estimate for a reading of 15.

Yahoo! suffers

Weaker performance of the new Yahoo! deal was in line with a trend this past week of new issues hovering around par or slipping after release for secondary dealings, which is in contrast to 2- to 3-point climbs for many new convertible issues on their debuts recently.

"They upsized it and it was already modeling rich, so people were skittish. If this had come at a 1% coupon, up 50%, I think it could have done well, but at 0%, up 50%, I can see why this would happen," a New York-based sellsider said.

Yahoo! priced an upsized $1.25 billion of 0% convertible senior notes due Dec. 1, 2018 after the market closed on Wednesday.

"They overestimated demand," the sellsider said of the investment-grade credit. "There was an expectation that outrights would snap it up."

The problem, he surmised, is that "issuers are not leaving too much on the table, so there is not a natural demand to put it in the portfolio, plus it was too big. A deal size of $750 million would have been better," he said.

The Rule 144A Yahoo! deal, which was increased to $1.25 billion from $1 billion, has a $187.5 million 30-day greenshoe.

The notes were talked to yield 0% to 0.5% with an initial conversion premium of 45% to 50%, as previously reported.

Joint bookrunners were J.P. Morgan Securities LLC, Goldman Sachs & Co., Citigroup Global Markets Inc., BofA Merrill Lynch and Morgan Stanley & Co. LLC.

Settlement is expected Nov. 26.

The notes are non-callable. They are convertible into cash, shares or a combination of cash and shares before Sept. 1, 2018 only under certain circumstances.

About $100 million of the proceeds from the bond issue will be used to repurchase shares of common stock from purchasers of the notes. Roughly $70.4 million of the proceeds will also be used to pay for convertible note hedge transactions, which Yahoo! plans to enter into with initial purchasers of the bonds, with the aim of reducing potential dilution upon conversion of the notes.

Remaining proceeds will be used for general corporate purposes, which may include acquisitions and other strategic transactions, additional stock purchases and working capital. Yahoo! may also invest remaining proceeds into short- and long-term marketable securities.

WebMD trades weakly

WebMD priced $300 million of 1% seven-year convertible notes ahead of the market open on Thursday at a discount to par of 97.5.

One source said he saw the paper subsequently bid at 97.5, and a second source said that the bonds were offered at 97.

Citigroup, which was bookrunner of the offering, declined to comment on the WebMD convertibles on Thursday.

The Rule 144A deal has an over-allotment option for up to an additional $50 million of notes.

The seven-year notes are non-callable with no puts and no contingent conversion.

Settlement upon conversion will be in stock only.

Proceeds from the sale will be used for general corporate purposes, which may include acquisitions and the repurchase of common shares, and for working capital.

Mentioned in this article:

American Residential Properties Inc. Nasdaq: ARPI

Forestar Group Inc. NYSE: FOR

GAIN Capital Holdings Inc. Nasdaq: GCAP

WebMD Health Corp. Nasdaq: WBMD

Yahoo! Inc. Nasdaq: YHOO

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