Convertibles weaker; Apollo drops with add-on; Ligand, EnerNOC flattish; planned AOL eyed

By Rebecca Melvin

New York, Aug. 13 – U.S. convertibles were weaker on Wednesday as four new issues debuted in trade.

“Everything was for sale today; I don’t know, maybe it was too much paper,” a New York-based trader said.

The four deals were for a relatively small $625 million in base deals. But another new deal for $300 million was expected to price after the market close from AOL Inc., and Priceline Group Inc. launched a deal of up to $1 billion of convertible senior notes after the close.

As for the session’s new deals, Apollo Commercial Real Estate Finance Inc.’s 5.5% convertible senior notes were described as “getting crushed” as the New York-based real estate investment trust priced a $100 million add-on of notes at 102 to an existing issue, raising the deal size to $258.75 million.

The Apollo 5.5% notes traded mostly between 101 and 101.75, and late in the session were at 101. That was a point lower than where the new issue priced and about 4 points below where the issue had been trading previously.

It didn’t go well for new or old holders of that paper, a trader said of Apollo.

Ligand Pharmaceuticals Inc.’s newly priced 0.75% convertibles traded last at 99.5 bid, 100 offered with shares down 1.3% at the end of the day.

EnerNOC Inc.’s newly priced 2.25% convertibles were at 100.25 Wednesday afternoon with shares close to the flat line. Later, shares dropped down again and ended lower by 2% at $19.35.

Also debuting in the market on Wednesday were Rex Energy Corp.’s 6% perpetual convertible preferreds, but those securities were not heard in trade after the State College, Pa.-based energy exploration and production company priced an upsized $140 million of the preferred stock at the cheap end of talk.

Traders were looking ahead to the pricing of the AOL deal, but weren’t expecting too much in terms of first-day gains.

“It will probably trade around par or a little above,” a trader said. He didn’t think the deal was cheap despite the fact that based on the underwriters’ inputs, the valuation was 2 points cheap.

Also on Wednesday, InterMune Inc.’s convertibles traded up on an outright basis, but were seen in line, or flat, on a dollar-neutral basis, after the Brisbane, Calif.-based biotechnology company reported earnings and said it has hired bankers to help it determine the best strategy to handle incoming buyout offers from larger pharmaceutical companies.

InterMune’s 2.5% convertibles due 2018 traded up 15 points to 168.46, according to Trace data. InterMune shares were up $6.57, or 14%, to $52.06.

“InterMune was up in line dollar neutral, or in a tiny bit. The premium didn’t expand,” a trader said.

Apollo drops with add on

Apollo’s 5.5% convertibles were trading actively on Wednesday and on average at about 101, which was down a point from where the add-on priced and lower from about 105 where the issue was trading previously.

“ARI is getting crushed. Investors that got bonds on the deal sat tight, except a bunch of retail prints that took it a point lower, and they were in about 3 points before today,” a New York-based trader said.

The new registered bonds represent a reopening of an issue priced initially earlier this year in March. The new bonds priced at the cheap end of 102 to 103 price talk, but all other terms are identical to the original issue, and lift that issue to $258.75 million in size if the $15 million greenshoe of the current deal is exercised.

The deal was sold via joint bookrunners J.P. Morgan Securities LLC, BofA Merrill Lynch and Citigroup Global Markets Inc.

The notes are non-callable with no puts.

Proceeds will be used to repay amounts outstanding under the company’s repurchase facility with JPMorgan Chase Bank NA, and, to the extent not used therefor, to acquire the company’s target assets, which include commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities and other commercial real estate-related debt investments, and for general corporate purposes.

New Ligand, EnerNOC active

Ligand’s newly priced 0.75% convertibles were seen closing out the day at 99.5 bid, 100 offered, according to a syndicate source.

Ligand’s shares shed 70 cents, or 1.3%, to $54.89.

“It’s a little weak,” the syndicate source said of the market, in general.

Earlier the bonds were seen trading “wrapped around 100” after the San Diego, Calif.-based biopharmaceutical company priced $225 million of the five-year senior notes.

The Rule 144A offering was sold via joint bookrunners BofA Merrill Lynch and Deutsche Bank Securities Inc.

The company has also authorized a $200 million share repurchase program over the next 12 months.

Proceeds of the bond issue will be used to repurchase up to $45 million of shares of common stock concurrently with the bond offering, with remaining proceeds for additional share repurchases of up to a total of $200 million. Proceeds will also be used to fund the net cost of a call spread, or convertible note hedge and warrant transactions that are also planned in connection with the deal.

The notes are non-callable with no puts.

EnerNOC’s newly priced 2.25% convertibles traded actively and were seen around 100 despite weaker shares.

The Boston-based energy intelligence software company priced an upsized $160 million of those five-year senior notes at the midpoint and beyond the rich end of talk.

EnerNOC shares fell 44 cents, or 2.2%, to $19.35. The bonds traded more actively than the Ligand deal, according to Trace data.

AOL to price

AOL planned to price $300 million of five-year convertible senior notes late Wednesday at a 0.625% to 1.125% coupon and a 32.5% to 37.5% premium.

The underwriters went out with a pretty tight credit spread that made the deal look about 2 points cheap, a trader said.

Using the underwriters’ credit spread of 225 basis points over Libor and a 32% vol., the deal looked about 2% cheap at the midpoint of talk.

That credit spread translates to a BBB spread, the trader said. “But with a $3 billion market cap, I don’t know that the company warrants a BBB spread. That’s pretty tight,” a trader said, suggesting a BB, high-yield spread instead.

“Maybe that’s why the market is putting that price sensitivity at the midpoint to cheap end,” he said.

He expected that the deal would likely do no better than flattish to slightly higher on its debut.

“There was some price sensitivity in the book,” the trader said, referring to the fact that potential investors were looking to buy only at the midpoint or cheap end of talked terms.

“Maybe people are waking up to the whole market being too tight, not only convertibles, but corporate credit, in general,” he said.

Mentioned in this article:

AOL Inc. NYSE: AOL

Apollo Commercial Real Estate Finance Inc. NYSE: ARI

EnerNOC Inc. Nasdaq: ENOC

Ligand Pharmaceuticals Inc. Nasdaq: LGND

Priceline Group Inc. Nasdaq: PCLN

Rex Energy Corp. Nasdaq: REXX

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