BroadSoft expands on hedge as shares plunge; Molycorp lower; MGIC gains; Redwood upsizes

By Rebecca Melvin

New York, Feb. 28 - BroadSoft Inc.'s 1.5% convertibles fell by more than 10 points on an outright basis on Thursday but gained on a dollar-neutral, or hedged, basis after the Gaithersburg, Md.-based telecom software maker's disappointing outlook for 2013 sent its underlying shares down 32%.

The BroadSoft's convertibles expanded a few points dollar neutral, with market players generally holding the bonds on a 50% to 70% delta.

Molycorp Inc.'s two convertible bond issues pared early losses after the Greenwood Village, Colo.-based rare earths minerals producer shocked markets during the pre-open with an announcement that determining the size of a substantial write-down will mean filing of its annual 10-K report will be delayed two weeks and quarterly earnings due Thursday will be delayed to coincide with the 10-K filing.

Moving the other direction, MGIC Investment Corp.'s convertibles jumped as the underlying shares swung from losses to gains after the Milwaukee-based mortgage insurer posted a wider fourth-quarter loss on better-than-expected revenue.

Meanwhile, Radian Group Inc.'s 2.25% convertibles, which notched a stellar debut in the secondary market Wednesday, extended gains by another 5 points on Thursday, trading at 109.5, according to Trace data, on a 4.3% rise in the underlying shares. Radian priced an upsized $400 million offering of six-year convertibles on the rich end of revised terms late Tuesday.

In the primary market, Redwood Trust Inc.'s offering of five-year convertible senior notes launched before the market open, was upsized to $250 million from $150 million during the session and talk was revised ahead of final terms seen being fixed late Thursday.

High demand from both hedged and outright investors was attributed to the fact that so much existing paper is going away in the secondary market due to redemptions and maturities, a syndicate source said.

The planned Redwood Trust offering traded up in the gray market to 102 bid, 103 offered even after talked terms were tightened.

BroadSoft mixed on earnings

BroadSoft's 1.5% convertibles traded down more than 10 points on an outright basis to as low as 93.647, and settled around 93.75 at the end of the session. Prior to Thursday's news the paper was seen at 104.75.

BroadSoft shares skidded $9.91, or 32%, to $21.00 in heavy volume.

The BroadSoft convertibles, which are held on a 50% to 70% delta, held up and expanded on a hedged basis, sources said.

The telecom software company said that its net income for the fourth quarter fell 12% to $4.9 million, or 17 cents per share, amid higher costs. Excluding one-time items, the company said it would have earned 47 cents, which was better than the 41 cents that analysts' expected.

However, the company's outlook was more disappointing. It said it expects full-year adjusted earnings of $1.10 to $1.35 per share, which is well below the $1.68 per share that analysts were looking for. Its first-quarter outlook of earnings of 2 to 12 cents per share was well below the consensus forecast of 34 cents per share.

A drop in consumer applications revenue as wireless carriers roll out 4G networks has offset growth in business offerings.

Oppenheimer & Co. downgraded BroadSoft's stock to "perform," which is the equivalent of neutral, from "outperform."

Molycorp down on warning

Molycorp's 6% convertibles due 2017 pared losses and ended down a point or two at 75, having traded down earlier to as low as 70.5, a Connecticut-based trader said.

Molycorp's older 3.25% convertibles due 2017 also pared losses and ended down a point or two at 62.3, having traded down earlier to as low as 58.

"They eased back with the shares," the trader said.

Molycorp shares opened sharply lower at $5.69, which was down nearly 9% from the previous close. But they moved up to the flat line by early afternoon and ended lower by a dime, or 1.6%, at $6.14 in heavy volume.

The company disclosed in a press release that its annual 10-K report due March 1 would be delayed until March 15 due to expected substantial non-cash goodwill impairment charges related for the most part to its $1.2 billion acquisition of Neo Material Technologies Inc., a processor of rare earth ores into magnetic powders and alloys, last June.

Molycorp also said it would delay its earnings release.

Gimme Credit analyst Evan Mann said that the announcement along with continued operational delays and weak rare earth pricing "is causing us to reconsider our buy recommendation. We will revisit our rating and update our 2013 projections once fourth-quarter results are finally released."

He added that although Molycorp is seeing signs of demand beginning to stabilize, further price declines can't be ruled out and a potential recovery in pricing is likely at least several quarters away."

A convertibles trader said the company "keeps stepping on itself."

MGIC pops

MGIC's 5% convertible senior notes due 2017 jumped 6 or 7 points to 83.5.

MGIC's 9% convertible junior subordinated debentures due 2063 traded up 10 points to 59 from 49.

MGIC shares opened lower compared to the previous day's close, but rose during the session, closing up 18 cents, or 6.4%, to $2.98.

"They had numbers out," a trader said regarding the move higher.

Initially investors appeared to be disappointed by the company's sharply lower capital position.

But while the results were hurt by a large charge related to a Freddie Mac settlement and an increase in reserves, revenue topped estimates.

For the most recent quarter, the company lost $386.7 million, or $1.91 per share, which was worse compared with a loss of $135.3 million, or 67 cents per share, in the year-earlier period.

The most-recent quarter included a one-time charge of $267.5 million related to the settlement of a Freddie Mac dispute. MGIC also boosted its loss reserve estimates by about $100 million during the period to account for probable settlements.

Revenue dropped 17% to $371.4 million from $447 million. But it was better than the $279.6 million of revenue that analysts expected.

For the year, MGIC lost $927.1 million, or $4.59 per share, compared to a loss of $485.9 million, or $2.42 per share, in 2011, while full-year revenue fell 8% to $1.38 billion from $1.5 billion.

The percentage of delinquent loans at 2012's end was 12%, excluding bulk loans. This is down from nearly 14% at the end of 2011.

Redwood upsizes, tightens

The planned $250 million of Redwood Trust convertibles saw price talk revised to 4.625% to 4.875% with an initial conversion premium of 17.5% to 20%, which was tightened from 4.875% to 5.375% with an initial conversion premium of 12.5% to 17.5%.

Valuation of the deal was heard using a credit spread of 600 basis points over Libor and a 20% vol.

"That's pretty realistic," a syndicate source said of the inputs. "The bond floor is pretty high with a 4-handle coupon, and the stock can move and has had a great start moving from $12 to $20" in the last eight or nine months.

The company "has a good equity story. There is good outright interest and hedged interest; it appeals to both," the syndicate source said.

Redwood buys, packages and securitizes jumbo home mortgage loans, or those home loans of $800,000 and over.

The registered Redwood offering was being sold by J.P. Morgan Securities LLC and Barclays, acting as joint bookrunners, with co-managers Goldman Sachs & Co. and JMP Securities LLC.

The notes are non-callable with no puts. There is takeover protection.

Proceeds will be used for general corporate purposes, including funding its business and investment activity, which may include purchasing residential mortgage loans, funding the origination of commercial loans and acquiring mortgage-backed securities for its investment portfolio.

The notes mature April 15, 2018.

Redwood Trust is a Mill Valley, Calif.-based real estate investment trust.

Mentioned in this article:

BroadSoft Inc. Nasdaq: BSFT

MGIC Investment Corp. NYSE: MTG

Molycorp Inc. NYSE: MCP

Radian Group Inc. NYSE: RDN

Redwood Trust Inc. NYSE: RWT

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