New Encore Capital paper edges up; convertibles mostly quiet; strong bid for new issues

By Rebecca Melvin

New York, March 6 - Encore Capital Group Inc.'s newly priced 2.875% convertibles were said to have edged up on Thursday after the San Diego-based specialty finance firm priced an upsized $140 million of the seven-year paper toward the rich end of coupon talk and at the midpoint of premium talk.

The new Encore notes were quoted at 101 by a syndicate source when the stock was flattish in the early going. But by late morning, the Encore shares were higher by more than 2% and they ended up 2.5%. The bonds were not heard or seen by market players queried, however, and a closing level could not be obtained.

Encore's existing convertibles were relatively unchanged, a New York-based trader, quoting the Encore 3% convertibles due 2020 at 122.875 versus an underlying share price of $48.45 and the Encore 3% convertibles due 2017 at 163.5 versus the same share price of $48.45.

Elsewhere, trading volumes were light in convertibles, market players said.

"We had one active day this week, and all the others were sluggish; it seems people are sitting on their hands, I don't know if it's Russia or what, but there's not a lot of activity," a New York-based trader said.

Russia has moved troops into the Ukraine's Crimean Peninsula, and Moscow-backed Crimean officials said the region would hold a referendum to decide whether it should be annexed by Russia. President Barack Obama said Thursday that the referendum would violate international law and that new sanctions on Russia will "impose a cost" for the incursion into Ukraine.

Amidst that uncertainty, stocks were posting gains, but the convertibles market was quiet. A second source said, "Volumes are really light and each day seems slower than the previous day, although new issuance continues to do better."

For example, UTi Worldwide Inc.'s newer 4.5% convertibles have moved up 7.5 points on a dollar-neutral, or hedged, basis since the Virgin Islands-based ocean freight and logistics company priced $350 million of the five-year convertibles at the tight end of talk late last week.

"It's the same themes that were happening a year ago," the trader said. "The outright, boring stuff is getting richer and the in-the-money, hedged fund stuff is getting weaker, and it will probably continue for as long as the market keeps going up," a New York-based trader said.

Part of the reason for the richening of the outright names is that outright fund flows are strong while hedged fund flows are flat as stocks continue to rise and as the appetite for balanced paper remains strong.

That will probably turn around when the stock market turns lower, the trader said.

Meanwhile, USEC Inc.'s 3% convertibles due October 2014 gained about 2 points over the past two sessions to as high as 40 after the uranium supplier filed a pre-packaged Chapter 11 bankruptcy plan as expected in the U.S. Bankruptcy Court for the District of Delaware.

The filing will allow the Bethesda, Md.-based supplier of nuclear fuel and services to implement a restructuring agreement reached in December with the majority of the holders of the convertible notes.

Early on Thursday, the Labor Department said initial claims for jobless benefits fell by 26,000 to 323,000, which was lower than the 335,000 claims expected. In other data, factory orders for January fell by a greater-than-expected 0.7% for the month. Meanwhile, investors were looking ahead to the government's February employment report due Friday.

The two previous jobs reports missed expectations.

Stocks pared early gains, and the indexes ended mixed. The S&P 500 stock index closed up only 3.22 points at 1,877.03, and the Dow Jones industrial average added 61.71 points, or 0.4%, to 16,421.89, while the Nasdaq stock index slipped 5.85 points to 4,352.13.

Encore mostly quiet

Encore Capital's newly priced 2.875% convertibles due 2021 settled in at 101 in the early going Thursday, a syndicate source said.

Encore shares started the session flattish and then rose more than 2%, ending the session at $48.71, up $1.20, or 2.5%. The company's convertible bond was launched and priced the same day and didn't weigh on the stock.

The Rule 144A deal was upsized to $140 million from $125 million and priced toward the rich end of coupon talk.

Morgan Stanley & Co. LLC, Barclays, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and RBS Securities Inc. were joint bookrunners of the deal.

One trader opined that it was strange there was so little heard or seen of the new $140 million Encore convertibles in the aftermarket. The trader also mentioned that there were complaints from hedged players regarding the Cowen Group Inc. convertibles, which debuted in the market on Thursday, as many hedged participants felt they hadn't received the amount of allocations that they were due. The Cowen convertibles jumped 3 points on a dollar-neutral basis on Thursday.

The Encore notes are non-callable, with no puts. There is takeover and dividend protection, and the notes are contingently convertible before Sept. 15, 2020 if shares exceed 130% of the conversion price for a specified period of time.

In connection with the sale of the notes, the company entered into capped call transactions with initial purchasers of the notes or their affiliates. With a strike at $83.1425 initially, it raises the bond's 25% premium to about 75% from the issuer's perspective.

Proceeds will be used to pay the cost of capped call transactions and for general corporate purposes, including working capital.

Mentioned in this article:

Encore Capital Group Inc. Nasdaq: ECPG

Cowen Group Inc. Nasdaq: COWN

USEC Inc. NYSE: USU

UTi Worldwide Inc. Nasdaq: UTIW

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