Dominion seen in gray near reoffer price; convertibles mostly quiet, better sellers seen

By Rebecca Melvin

New York, June 3 - Dominion Resources Inc.'s planned $1 billion of three-year mandatory convertible equity units were quoted in the gray market Monday around their talked reoffered price - which was a 2% discount to par - ahead of final terms seen being fixed after the close.

The new deal wasn't seen as "very exciting" to traditional market players.

Overall, the tone of the session was a bit weaker, extending the general tone of the last one or two weeks, sources said.

"There were better sellers," a New York-based trader said, meaning that it was easier to buy things.

"Most of the activity I see is better to the sellside, and a lot of names are catching up in pricing and 'in' quite a bit from last week," the trader said.

There were a number of reasons for the contraction, sources said. First, pricing has run up very high with the underlying shares and there appears to be some profit-taking. Second, valuations don't justify current pricing. And third, there has been stronger new issuance in May, and market players seem to be focused on the new paper rather than the secondary market, to replenish supplies that are being drained by this month's maturities.

Volcano Corp. was little changed outright with higher shares of the San Diego-based medical device company, but on a dollar-neutral, or hedged, basis, they were seen to have contracted between 0.10 point to 0.25 point, depending on the delta hedge.

Annaly Capital Management Inc.'s 5% convertible senior notes due 2015 were also in trade on Monday and they looked about unchanged on the day. But they have come in nearly a point in the past two weeks, a New York-based trader said.

Also in the primary market, Array BioPharma Inc. launched after the market close an offering of $100 million of seven-year convertible senior notes. They were expected to price with a 3% to 3.5% coupon after the market close Tuesday.

Market bid is weaker

Traders were evaluating where prices stand at this point five months into the year. The bid to the market has not been as strong in the last one week to two weeks, sources said.

"With the new issue paper, people seem less attracted to the secondary and oriented to the new paper," a New York-based trader said.

But on Monday the market was not trading actively.

"A lot of guys are pricing," a trader said, referring to marking of books particularly on the buyside. "Most guys are looking at valuations again and a lot of stuff trading has no right to be where it is. It doesn't make a lot of sense, and with the [broader] credit market coming in, convertibles are following suit," the trader said.

"It will be interesting to see whether there is follow through continuation, and guys take some risk off the table or if it shapes up to be another buying opportunity," he said.

Dominion units to price

The planned Dominion $1 billion of 20 million of equity units were seen in the gray market at 48.5 bid, 49.5 offered ahead of final terms seen being fixed after the market close.

The deal was launched ahead of the market open Monday and talked at a reoffered price of $49.00, compared to the $50.00 par.

"No one seems very excited about it. It really looks very uninteresting to us," a New York-based trader said.

The registered, off-the-shelf deal was being marketed via joint bookrunners J.P. Morgan Securities LLC, BofA Merrill Lynch, Goldman Sachs & Co., and UBS Investment Bank.

The deal was coming in two equally sized tranches, one with a slightly shorter duration and higher coupon.

The 10 million of series A units were being talked at a coupon of 5.625% to 6.125% and an initial conversion price of 17.5% to 22.5%, with a maturity date of April 1, 2016.

The 10 million of series B units were being talked at a 5.5% to 6% coupon and an initial conversion premium of 17.5% to 22.5%, with a maturity of July 1, 2016.

The notes will be non-callable for life with no puts. They have takeover and dividend protection.

Proceeds will be used for general corporate purposes and to fund its growth plan, including the Cove Point liquefaction project.

Volcano comes in

Volcano's 1.75% convertibles due 2017 traded at 94.595 versus an underlying share price of $19.17 on Monday, compared to 94.60 versus an underlying share price of $19.07 previously.

Volcano shares were traded up by 23 cents, or 1.2%, to $19.32 in solid volume.

That was seen as a contraction on a dollar-neutral, or hedged, basis of as much as 0.25 point, sources said.

The San Diego, Calif.-based medical device maker makes products for the diagnosis and treatment of vascular and structural heart disease.

Annaly lower recently

Annaly's 5% convertibles due 2015, which priced a year ago at a discount to par of 98, traded at 101.75 on Monday, which was little changed on the day. But it had been around 102.5 in the last couple of weeks, a trader said.

Sources said that shares of Annaly, a New York-based real estate investment company, had run up along with other financial names. But in recent weeks financial convertible names have come in as the market weighs the potential for interest rates to continue to creep higher.

It might be that convertibles players are taking profits at this point, a trader said.

Array BioPharma to price

Array's planned $100 million of seven-year convertible senior notes were seen pricing after the market close Tuesday and talked to yield 3% to 3.5% with an initial conversion premium of 27.5% to 32.5%, according to a market source.

The registered, off-the-shelf offering has a $15 million greenshoe and was being sold via joint bookrunning managers Goldman Sachs and JPMorgan.

The notes are non-callable until June 4, 2017 and then are provisionally callable if the stock price exceeds 130% of the conversion price, with a make-whole premium based on its fundamental change make-whole table. There are no puts.

Along with takeover protection, there is dividend protection is in the form of a conversion rate adjustment.

About $96.6 million of net proceeds will be used to repay its outstanding secured debt, with remaining proceeds for general corporate purposes.

Boulder, Colo.-based Array is a biopharmaceutical company focused on targeted small molecule drugs to treat cancer.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Array BioPharma Inc. Nasdaq: ARRY

Dominion Resources Inc. NYSE: D

Volcano Corp. Nasdaq: VOLC

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