Convertibles mostly lower as stocks drop; Charming Shoppes down; Thornburg, NovaGold eyed

By Rebecca Melvin

New York, March 19 - The convertible bond market was quiet on Wednesday, with activity muted by another wild gyration of the stock markets to the downside, market participants said.

News of two new issues hit the tape, including Thornburg Mortgage Inc.'s $1 billion of seven-year convertibles, which inspired puzzlement given its negative initial conversion premium.

There was also a $100 million deal from Canada's NovaGold Resources Inc. for seven-year convertibles expected to price after the close Wednesday.

NovaGold's deal brought the total number of new issues expected to price after the close to three. Also planning to price were Medical Properties Trust Inc.'s $125 million of five-year exchangeable senior notes and Alexandria Real Estate Equities Inc. 's $250 million of convertible preferred stock.

Market players also eyed interesting opportunities, including plays on Charming Shoppes Inc., which saw its shares slide after the Bensalem, Pa.-based women's apparel retailer reported a loss for the quarter.

A few mining names traded lower amid lower gold prices, including Newmont Mining Corp. and Stillwater Mining Co.

"I didn't see that much trade. Yesterday seemed like a short-term blip as people are afraid about credit, and there's a lot of deleveraging going on," a New York-based sellside convertibles strategist said.

On Tuesday the S&P 500 Index and the Nasdaq Composite Index both rose 4%, and the Dow Jones Industrial Average surged more than 400 points. But on Wednesday, the DJIA dropped by almost 300 points.

Meanwhile many commodity prices were down on Wednesday, with Comex gold for March delivery down by $58.50 an ounce, or 5.8% to $944.70.

Convertibles players were unfazed by the large drop in gold, with one saying that gold and oil are a safe haven in markets like these.

Thornburg swings lower again

Swings of 50% have become commonplace with securities bearing the Thornburg name since the Santa Fe, N.M.-based mortgage lender announced early this month that there was "substantial doubt" it could continue as a going concern due to an unprecedented deterioration of prices of its mortgage-backed collateral and liquidity pressure stemming from margin calls.

News Wednesday that Thornburg will try to raise $1 billion in convertibles as part of an effort to stem margin calls sent the common stock and convertible preferred shares plummeting again, after a rally on Tuesday.

The Thornburg preferred 10% preferred series F fell nearly 40% to $5.00.

The proposed convertibles issue was expected with a 12% coupon and an initial conversion premium 75% below the closing price of Thornburg common shares on March 18.

One source referred to the pricing as "funky."

Bookrunners include Friedman Billings Ramsey, Jefferies & Co., JMP Securities, UBS Investment Bank and Keefe, Bruyette & Woods. There is a greenshoe of $150 million.

Thornburg said it has entered into a 364-day agreement with five of its remaining reverse repurchase agreement counterparties who are providing about $5.8 billion of reverse repurchase agreement financing under which they have agreed to both a contractual reduction of margin requirements for financing the company's mortgage securities and a suspension of their rights to invoke further margin calls.

The company must raise at least $948 million of net new capital within seven business days as part of the agreement.

It must also maintain a liquidity fund totaling $350 million and an amount in the fund equal to 5% of monthly outstanding borrowings under reverse-repurchase-agreement counterparties in investments that are either Treasuries, agency mortgage-backed securities, or retained classes of mortgage securities from loan originations.

As part of the deal, the company will issue the five lenders warrants to purchase 47 million shares, or 27% of outstanding common stock, at an exercise price of $0.01 per share, good for five years.

Shareholders must approve the conversion of notes into common stock, which could result in the issuance of more than 500% of the currently outstanding shares.

Larry Goldstone, Thornburg's president and chief executive, said the agreement represents a "high degree of confidence" that the reverse repurchase agreement counterparties have in the company's origination franchise, the quality of its assets and the strength of its management team.

The reverse repurchase agreement counterparties include Bear Stearns Investment Products Inc., Citigroup Global Markets Limited, Credit Suisse Securities (USA) LLC, Credit Suisse International, Greenwich Capital Markets Inc., Greenwich Capital Derivatives, Royal Bank of Scotland PLC, and UBS Securities LLC.

Thornburg shares (NYSE: TMA) closed at $1.50, down 50%.

NovaGold isn't seen rich

The $100 million of seven-year convertibles that NovaGold planned to price was seen cheap by 4.5% at the midpoint of talk using very wide spreads and a cap on volatility of 45%, according to one analyst. The cheapness was based on talk on the senior unsecured notes of between 4.25% to 4.75 for the coupon, with an initial conversion premium of 35% to 40%.

There is an over-allotment option for up to an additional $15 million of notes.

J.P. Morgan Securities Inc. is bookrunner of the registered offering, which has no calls, and a put in year five. The notes also have dividend and takeover protection and net share settlement.

Proceeds from the offering will be used to repay about C$16 million currently drawn down under the company's C$30 million short-term credit facility, to fund general exploration and development on the company's projects, and for general corporate purposes.

NovaGold's shares (NYSE: NG) dropped 11.3% to $7.85, but part of that was viewed as a result of the sharp drop in gold.

The borrow is in question but the fundamentals of the company were seen favorably as capital expenditure is trending down and it's starting to produce, according to a Connecticut-based sellside analyst.

NovaGold is a precious metals exploration and development company based in Vancouver, B.C.

Charming Shoppes slips lower

Convertibles players were looking over the vital statistics of Charming Shoppes and possibilities that its 1.125% convertibles due 2014 present after the company reported earnings that were disappointing.

"There's a good chance of it getting banged up in this kind of slowdown," said Mark Henriquez, head convertibles trader at J. Giordano Securities Group in Connecticut.

Charming Shoppes is a specialty apparel retailer that sells under brands like Lane Bryant and Fashion Bug.

Henriquez pointed out that the company also owns the fifth largest proprietary credit card business, which could present additional risk for the company.

"In this kind of environment where people are walking away from homes, there's potential that people are not going to honor that kind of obligation," he said.

It's a BB- credit, he pointed out, which could get worse without substantial increase in sales. The convertibles aren't actively traded, and the paper isn't viewed as that attractive given the long term of the bonds, among other things.

The 1.125s closed down Wednesday at 65.81, versus a stock price of $4.65, compared to a close of 68.15, versus a closing price of $5.31 on Tuesday. Charming Shoppes shares (Nasdaq: CHRS) dropped 12.4%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.