Iconix jumps on financing to repay 2.5% convertibles; energy, commodities bouncing back

By Rebecca Melvin

New York, March 7 – Iconix Brand Group Inc.’s two convertible bond issues jumped on Monday after the New York-based brand management company announced it has obtained financing to repay the 2.5% convertibles that are due June 1.

Iconix entered into a new five-year $300 million senior secured term loan credit facility provided by credit funds managed by affiliates of Fortress Investment Group LLC. The loan must be used to repay the convertibles.

Iconix was the name of the day and a good trade for the convertibles market, market sources said.

“ICON is just about the only name trading today,” a New York-based trader said.

But the continued updraft in oil and other commodities markets could not be ignored, and several convertible energy names tacked on another 2 points to 3 points, which has been the trend in place for the last week.

There was no single factor pinpointing why commodities, including a record rise in iron ore on Monday, are moving up so single-mindedly. One source chalked it up to momentum and the fact that the sector was deeply oversold.

Chesapeake Energy Corp. and Whiting Petroleum Corp. were up again, with the Chesapeake 2.5% convertibles due 2037 seen up another 2.5 points on the day to 59 bid, 59.25 offered on Monday.

That issue was around 55 on Friday and around 53 on Thursday.

Whiting’s 1.25% convertibles were up another almost 3 points to 51 bid, 53 offered versus a $7.09 stock price.

Whiting was the subject of Barron’s newsprint over the weekend, and the Denver-based energy exploration and production company was noted as needing to raise more capital and likely to tap the markets sometime soon. It is unlikely that it will come back to the convertibles market because it “can’t tap on advantageous terms; they would get absolutely clobbered,” a New York-based sellsider said.

Primary silent

Despite the energy recovery underway and the fact that markets are less volatile in the last several weeks overall, equities, which are a governing factor in convertibles issuance, are still down from the end of last year.

Although the S&P 500 stock index has recovered about 9% since its low mark on Feb. 11, the index is still down 2.4% from the end of 2015. The Nasdaq stock market is down about 6%.

“It’s hard to get companies to opportunistically issue when their stocks are down; and a lot of tech stocks are still down 15% to 20% below recent peaks, or on a year to date,” a New York-based syndicate source told Prospect News.

Most potential issuers are “waiting, evaluating,” and while there may be a stray deal or two priced before the end of the month – which marks the end of the quarter, a real reopening of the convertibles market is not expected before the end of April or early May, the syndicate source said.

“I wouldn’t be surprised if we saw a couple of deals before the end of the month. The market itself is in pretty good shape and any new issues are going to get the full attention” of the demand side, the source said, noting that in another week or two blackout periods facing companies prior to their regulatory reporting are going to start kicking in, and that will hamper a recovery in the new issuance market in the immediate future.

A second New York-based syndicate source noted that there is usually a lag between when markets stabilize following a period of volatility and when credit markets recover. The source referenced a drop off in the convertible primary market in 2011 as the last big period of volatility: “it took a couple of quarters before issuance picked up,” the syndicate source said. “But with another few days like this, there may be a few people standing on the sidelines willing to dip their toe in.”

The syndicate source didn’t think there is a significant backlog that will break loose once the primary market reopens.

“Convertible debt is more of an opportunistic capital raise and not used that much in the context of announced M&A,” he said, which would constitute more of a backlog.

Iconix jumps on financing

Iconix’s 1.5% convertibles due 2018 jumped about 9 points to 67 from 58 in the early going, a New York-based trader said. And near the end of the session there was a trade at 67.375.

The Iconix 2.5% convertibles due 2016 were up 4 or 5 points to 98.5 to 99.

Iconix shares also jumped, ending the session up $1.58, or 19%, to $10.02.

The new term loan will bear interest at Libor plus 1,000 basis points per annum, payable quarterly with a 1.5% Libor floor. That is expected to result in $9 million of additional interest expense and amortization of financing fees from what was previously forecasted in the company’s guidance for the full-year 2016. Updated guidance for 2016 will be provided when it reports its fourth quarter, Iconix said in a news release.

The company has plenty of cash flow to pay the interest, and it looks like “directors/management are taking a bullish tack, in my view, paying a high rate of interest, rather than issue shares or a convertible at the current low stock price,” a market source said.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Iconix Brand Group Inc. Nasdaq: ICON

Whiting Petroleum Corp. NYSE: WLL

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