By Rebecca Melvin
New York, March 1 - Stone Energy Corp.'s newly priced 1.75% convertibles jumped in trade upon release to the secondary market Thursday, following pricing at the rich end and beyond the rich end of talk late Wednesday.
The Stone Energy convertible, which was multiple times oversubscribed, saw significant demand from both outright and hedged investors and was allocated predominantly to fundamental, or outright, investors, a syndicate source said.
Meanwhile, the 1.5% convertibles of DealerTrack Holdings Inc., which debuted in the secondary market on Wednesday, remained active and notched another gain Thursday.
The new DealerTrack convertibles extended gains to stand at 106 bid, 106.75 offered at the end of the session versus an underlying share price of $28.87, a syndicate source said. That compared to 103.5 bid, 104 offered at the end of Wednesday.
"It was still a very active name, mostly dominated by outright interest," the source said of DealerTrack.
Back in established issues, AMR Corp.'s distressed 6.25% convertibles due 2014 were active and pushed higher by more than a point to 32.75, amid no readily apparent news, sources said.
AMR's pricing, stretching well above 30, represented high marks for the paper since the air carrier filed for bankruptcy late last year.
James River Coal Co.'s 4.5% convertibles were better by about a point outright, but unchanged on a dollar-neutral, or hedged, basis Thursday, after the Richmond, Va.-based coal company posted a quarterly loss that missed analysts' forecasts.
James River's results were not as bad as some had feared, apparently, and the stock as well as the whole capital structure moved up in concert following the report, a New York-based analyst said.
With a second new issue pricing in the market in as many days, market players were hopeful that the deals signaled the new issue market was reopening in earnest following a hiatus of more than a month.
"I'm hoping that this wakes up issuers. The fact that these types of companies are being so well received should wake up issuers and get them thinking," a New York-based syndicate source said.
As for why issues came this week after many weeks, one trader said, "It looks like guys are calling a top for the stocks, or guys know how to price things now."
Stone Energy charms market
Stone Energy's newly priced 1.75% convertibles due 2017 traded up to 103.5 bid, 104 offered on their debut in secondary markets on Thursday, while the underlying shares of the bonds, lifted about 70 cents, or 2%, to $32.65.
The new paper was seen at the same level at the market close even though shares pared some of those gains, to end up 47 cents, or 1.5%, at $32.42.
The independent oil and natural gas exploration and development company, based in Lafayette, La., priced an upsized $275 million of five-year convertible notes at par late Wednesday to yield 1.75% with an initial conversion premium of 33.5%.
That pricing was at the rich end of talk for the coupon and beyond the rich end of 25% to 30% talk for the initial conversion premium.
There was high demand for allocations of the new energy convertible from all market participants, a syndicate source said.
"I was shocked at the pricing," a syndicate source said. "It was talked 2%, up 27.5% at the midrange, so it was really strong."
DealerTrack got impressive pricing also, the syndicate source said. And such pricing hopefully sends a message to would-be issuers to tap the convertible market.
DealerTrack and Stone Energy are mid-cap, single B-ish type credits, and they got very good pricing, he said.
Underwriters are starting to build calendars right now, he said. At the end of last year, the market was "really slow." There was talk of deals coming, which never did, he said.
Part of the problem, he said, was that in 2011 companies didn't really need funding. But hopefully, with equity markets doing well this year, and companies feeling more comfortable with their stock prices, they will be more likely to tap the market as the need arises, he said.
Stone Energy benefited somewhat from its market sector in the energy space.
"It's a volatile sector, with oil prices all over the map for the last couple of years , so it really suits a convert investor in providing limited downside," the syndicate source said.
Commenting on DealerTrack, which lost steam heading in to the market close on Wednesday, the source said it seemed to be a function of an overall market slip and not due to the company itself.
"The market started out up, and then it closed down. It was up 53 points, exactly where it is today," he said.
Stone Energy's Rule 144A offering was initially going to be $250 million in size and it was upsized to $275 million, while the over-allotment option remained unchanged at $25 million.
Barclays Capital Inc. and Bank of America Merrill Lynch were the joint bookrunners.
The notes are non-callable with no puts, and they have dividend and change-of-control protection.
The securities also have contingent conversion at a price hurdle of 130%.
In connection with the offering, the company entered into convertible note hedge and warrant transactions. The warrants have an initial strike price of $55.9125, which means the call spread boosts the bond's conversion premium from the issuer's perspective to 75%.
Proceeds will be used to fund the cost of the convertible note hedge transactions and for general corporate purposes, which may include providing longer-term financing for the recently closed Pompano, Wideberth and Appalachian acquisitions and repayment of outstanding borrowings under the company's bank credit facility.
Investors will be drawn to this name, another sellsider said, because of limited supply of balanced convertibles in the energy sector.
There's demand for paper yielding 2% to 3% with a premium in the 25% to 45% range, he said.
James River moves on earnings
James River's 4.5% convertibles due 2015 traded up to 62 and were left at 61 bid, 63 offered at the end of the day, which was up a point on an outright basis, but unchanged on a hedged basis, according to a New York-based analyst.
Meanwhile shares of the Richmond, Va.-based coal producer jumped 48 cents, or 8%, to $6.21 in heavy volume.
The whole cap structure, including the James River 3.125% convertibles and the James Coal straight notes, were "up small," or a little better with the shares higher, the analyst said.
James River said it swung to a loss for its fourth quarter, and that loss missed expectations. But there was the feeling that things could have been worse, the analyst said.
Coal producers have suffered at the hands of cheaper natural gas, which has been used as a fuel of choice given its low price tag.
"The fourth quarter moved down slightly but costs were contained," the analyst said.
What will really tell the story is how second half prices for metallurgical coal hold up. "It's going to depend on that," the analyst said regarding the outlook for James River.
"They still have some coal to book for 2012," he said.
Mentioned in this article:
AMR Corp. Pink sheets: AAMR
| DealerTrack Holdings Inc.: | Nasdaq: TRAK
|
| James River Coal Co. | Nasdaq: JRCC
|
| Stone Energy Corp. | NYSE: SGY
|
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