M/I Homes adds outright, on hedge on debut; planned MGIC gains in gray with revised terms

By Rebecca Melvin

New York, March 6 - M/I Homes Inc.'s newly priced 3% convertibles traded up Wednesday and expanded on a dollar-neutral, or hedged, basis after the Columbus, Ohio-based residential home builder priced an upsized, but still small, $75 million of five-year convertible bonds at the midpoint of talk.

The new M/I Homes issue was the most actively traded name of the day, which was surprising given the size of the deal, sources said.

M/I Homes also priced a concurrent offering of 2.14 million common shares at $23.50 apiece.

Elsewhere, there was action in the gray market for two other deals expected to price imminently. MGIC Investment Corp.'s planned $350 million of seven-year convertibles surged in the gray market to 105. Even after the deal's pricing was revised tighter, making the paper more expensive, the deal traded in the context of 103 to 104.

MGIC got more attention in the convertibles market than a second deal from Invesco Mortgage Capital Inc., which priced late Wednesday at an upsized $350 million to yield 5% with an initial conversion premium of 15%. That deal was issued via operating partnership IAS Operating Partnership LP and got up to 101 in the gray market before final terms were fixed.

The MGIC deal was said to be popular due to its sector in the mortgage business, which is particularly hot right now given the recovery in the housing market and the government's withdrawal from the mortgage business. Invesco is also associated with mortgages, but MGIC has two existing convertibles in the space, so the Milwaukee-based mortgage insurer is a known entity among convertibles players.

MGIC's existing convertibles have surged in the past few days to more than par from the upper 70s for its 5% convertibles and from the upper 40s for its 9% convertibles.

Back in the secondary market, Radian Group Inc., also a mortgage play, gave back some of its outsized gains amid a pullback in the underlying shares. The newer Radian 2.25%, which priced last week, had already surged to more than 120, but on Wednesday the $350 million issue fell nearly 6 points outright to 115.5, according to Trace data.

The underlying shares of the Philadelphia-based mortgage insurer also dropped 5% in active trading.

Profit-taking in the Radian paper, which was a central focus of trade late last week, wouldn't be surprising given the shares even after Wednesday's pullback are up 63% for the year so far.

Elsewhere, Encore Capital Group Inc.'s 3% convertibles due 2017, of which $115 million priced last November, printed at 51. But the bonds were also quoted later at 55 bid, 58 offered, with the underlying shares around $3.70, according to a New York-based trader.

The Encore deal, which came with a call spread weighted toward hedged players, was priced via underwriters Morgan Stanley, Barclays and BofA Merrill Lynch and JMP Securities, but the Rule 144A transaction isn't generally seen in trade.

The securities of the San Diego-based credit services company were pulled into trade after it announced that it has agreed to acquire competitor Asset Acceptance Capital Corp. for $6.50 per shares, or $200 million, representing a 13% premium to Asset Acceptance's Tuesday closing price.

In the broader markets, the Dow Jones industrial average notched a second straight all-time high, ending the session up 42.47 points, or 0.3%, at 14,296.24. On Tuesday, the Dow broke through its October 2007 record close, ending at 14.253.77, compared to the earlier record of 14,320.65. For the year the Dow is up 9.1%.

M/I Homes jumps

M/I Homes' newly priced 3% convertibles due 2018 were seen at 103.625 bid, 104.375 offered in late afternoon trading, which was down a point compared to 104.375 earlier in the session but still higher on both an outright and hedged basis, sources said.

The new issue was "surprisingly active considering the size of the deal," a New York-based syndicate source said. But there were other traders who said they hadn't seen it quoted.

Shares of the Columbus, Ohio-based residential home builder ended the session up 94 cents, or nearly 4%, at $24.84.

Given where the new deal was trading versus its underlying shares, it expanded about 0.625 point on a dollar-neutral basis and outperformed the stock, a syndicate source said.

The small, $75 million deal was upsized from an initially talked $50 million, and it was initially thought to be an add-on to an earlier deal, because it has the same structure of a $50 million M/I Homes deal priced last September.

Pricing at 3% with an initial conversion premium of 37%, the deal came at the middle of 2.75% to 3.25% coupon talk and the middle of 35% to 40% premium talk.

There is an $11.25 million greenshoe for the notes, which is up from $7.5 million.

Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Wells Fargo Securities LLC are the joint bookrunners for the registered notes offering, with Comerica Securities, the Huntington Investment Co., PNC Capital Markets LLC and U.S. Bancorp acting as the co-managers.

The notes are convertible at an initial conversion rate of 30.9478 common shares per $1,000 principal amount of notes, which is equal to a conversion price of $32.31 per share.

The convertibles will be non-callable until March 6, 2016 and then will be provisionally callable if shares exceed 130% of the conversion price for at least 20 trading days out of 30. There is takeover protection.

Proceeds will be used to redeem a portion of its outstanding 9.75% series A preferred shares and for general corporate purposes.

Planned MGIC gains in gray

MGIC's planned $350 million of seven-year convertibles jumped in the gray market on Wednesday ahead of pricing seen after the market close to 105. Even after terms were revised tighter, the deal was seen at 103 to 104 bid in the gray market, sources said.

Terms were revised to a 3% to 2.5% yield, up 30% to 35%, from original talk of a 3.75% to 4.25% yield with an initial conversion premium of 27.5% to 32.5%.

MGIC also plans to price 135 million shares of common stock.

MGIC's existing 5% convertibles due 2017 have jumped in the past couple of days to 101.9 on Wednesday from the upper 70s last week. Last Thursday, the 5% MGIC convertibles jumped 5 to 7 points to 83.5 after the mortgage insurer reported a better-than-expected quarterly loss.

MGIC's 9% convertible junior debentures due 2063 more than doubled, surging up to 103 from the upper 40s, a New York-based convertibles analyst said.

The reason behind the stellar moves is that the mortgage sector is hot right now as government intends to withdraw from its dominating presence of the last few years in the aftermath of the subprime mortgage crisis.

There have been four new deals in this space in recent weeks. Those deals have included most recently Redwood Trust Inc., a mortgage real estate investment trust based in Mill Valley, Calif., which priced an upsized $260 million of 4.625% five-year convertibles last week, as well as the deal for Radian, a mortgage insurer like MGIC, as well as Starwood Property Trust Inc., another mortgage REIT, which priced $450 million of 4.55% convertibles on Feb. 11.

Annaly Capital Management Inc. is another mortgage related REIT that has several existing convertible bond issues.

The registered offerings are being sold via bookrunner Goldman Sachs & Co. The notes have an over-allotment option of up to an additional $50 million of notes, and the shares have a 20.25 million share greenshoe.

The notes are non-callable for four years and then are provisionally callable subject to a 130% price hurdle. There are no puts.

There is change-of-control protection and dividend protection in the form of a conversion rate adjustment for any dividends paid.

Proceeds will be used for general corporate purposes, which may include increasing the company's insurance subsidiary capital and other subsidiaries and improving liquidity by providing funds for debt service.

Invesco upsizes, prices

Invesco priced an upsized $350 million of convertibles - from an initially talked $250 million - at the rich end of talked terms, or at 5% with an initial conversion premium of 15%, compared to talk at 5% to 5.5% and a 10% to 15% premium.

The five-year convertible bond issue was seen in the gray market ahead of pricing at only 100 bid, 100.5 offered initially during Wednesday's session, but it was seen later at 101 in the gray market.

The Rule 144A offering is being sold via joint bookrunners Credit Suisse Securities (USA) Inc., Citigroup and BofA Merrill Lynch and has a $37.5 million over-allotment option.

The notes are non-callable for five years. There is change-of-control and dividend protection and net share settlement.

Proceeds will be used to purchase the company's target assets, subject to the company's investment guidelines as a real estate investment trust, and for other general corporate purposes.

Based in Atlanta, Invesco invests in residential and commercial mortgage-backed securities and mortgage loans.

Mentioned in this article:

Encore Capital Group Inc. Nasdaq: ECPG

Invesco Mortgage Capital Inc. NYSE: IVR

MGIC Investment Corp. NYSE: MTG

M/I Homes Inc. NYSE: MHO

Radian Group Inc. NYSE: RDN

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