New Vantage jumps outright, on hedge; planned Merrimack looks cheap; Ascent Capital on tap

By Rebecca Melvin

New York, July 11 - Vantage Drilling Co.'s newly priced 5.5% 30-year convertibles jumped on their debut in the secondary market on Thursday after the Houston-based offshore drilling company priced an upsized $85 million of the notes at the midpoint and cheap end of talked terms.

The new Vantage convertible was up about 4.5 points to 5 points with the stock down nearly 7% in the early going, a syndicate source said. It was still up by about that much at the close, but the stock had recovered some, so the delta-neutral gain was not as strong.

The Vantage deal was small and trading was not broad-based.

Two other new deals - also small sized - were being evaluated by market players ahead of pricing seen after the market close.

Merrimack Pharmaceuticals Inc.'s planned $75 million offering of seven-year convertible senior notes looked about 2 points cheap, using a credit spread of 850 basis points over Libor, 40% vol., and 2% for stock borrow cost, a West Coast-based trader said. But given deal size and tight stock borrow no gray market was seen or expected to be seen ahead of terms being fixed, sources said.

Shares of the developmental-stage biopharmaceutical company plummeted, ending the session down $1.96, or 28%, at $5.03. A trader said that given the slide in the underlying shares, it wasn't out of the question that the deal could be canceled, or, he said, it could be done with a higher conversion price and premium than originally talked.

Another deal launched around the market open on Thursday was Ascent Capital Group Inc.'s $90 million of seven-year convertible senior notes that was expected to price after the market close Thursday. The Greenwood Village, Colo.-based company's convertibles were talked with a 4% to 4.5% coupon and 27.5% to 32.5% premium.

Elsewhere, the market was deemed "slow," compared to activity on Tuesday and Wednesday, which had picked up from the holiday slowdown.

The inactivity was attributed to volatile rates, which were up and down on Thursday, as well as to the general summer slow season.

Homebuilders that had been a focus on Wednesday were quiet Thursday despite a lift in the sector's shares.

Older homebuilder issues including those of Lennar Corp. and D.R. Horton Inc. were seen doing well with a pickup in vol., but the newer homebuilder convertibles, which have lower coupons, were not seen performing well with weaker Treasuries, a New York-based trader said.

Despite an 8% rise in the underlying shares of Lennar, the three convertible issues of the Miami-based homebuilder were not seen in trade.

"It's quieting down. It's that time of year. People are on vacation and that's just going to keep rolling through until Labor Day," a New York-based trader said.

The trader didn't think the fundamentals in the homebuilding sector were strong enough to merit the run up that the sector has seen, and he said he was not involved in those names.

A name to the downside was RadioShack Corp. Shares of the Fort Worth, Texas-based electronics retailer closed down 7% and the bonds were lower on a report that the company is seeking a financial adviser.

Overall, stocks resumed their recent climb after a one-day hiatus, rallying on comments by Federal Reserve chairman Ben Bernanke that the U.S. central bank is not intending to slow its stimulus program enough to cause higher interest rates. The Dow Jones industrial average rose 169.26 points, or 1.1%, to 15,460.92; the S&P 500 stock index jumped 22.40 points, or 1.4%, to 1,675.02 - which were both new highs, and the Nasdaq stock market gained 57.55 points, or 1.6% to 3,578.30.

The Treasury 10-year notes traded up 28/32, reducing yield to 2.56%.

Vantage jumps

Vantage Drilling's newly priced 5.5% convertibles due 2043 jumped on their debut in the secondary market on Thursday to 104.5 bid, 105 offered versus a share price of $1.81. They were called up about 8 points on a dollar-neutral, or hedged, basis using a 70% delta around midsession.

The paper didn't move around but "pretty much went straight up after they freed," a syndicate source said.

By the market close the bond was seen at the 104.5 to 105 level versus a share price of $1.85, which was a little weaker stock price that reduced the dollar-neutral gain, the syndicate source said.

Many traders said they didn't see the bond in trade.

"I never saw a market," a New York-based trader said. The trader added that typically deals under $150 million in size don't see a gray market and these last two deals were half that amount at least according to initial talk.

Vantage Drilling priced an upsized $85 million of notes ahead of the market open Thursday at par to yield 5.5% with an initial conversion premium of 22.5%, according to a syndicate source.

The Rule 144A deal was initially talked at $75 million in size. Pricing came at the midpoint of 5.25% to 5.75% coupon talk and at the cheap end of 22.5% to 25% talk for the premium.

Jefferies & Co. was left lead bookrunner, and there was a $15 million greenshoe for the deal.

The notes are non-callable until July 15, 2016 and then are provisionally callable for two years if shares rise to at least 150% of the conversion price. They are freely callable on or after July 15, 2018. They have investor puts in years three and five at par.

The notes also have takeover and dividend protection and net share settlement.

Upon conversion prior to July 15, 2016, investors will receive 1.75-years' worth of coupon payments.

A portion of proceeds will be used to fund the initial payment of $59.5 million under a construction contract for the Cobalt Explorer drillship with the remainder for general corporate purposes.

Merrimack looks cheap

Merrimack Pharmaceuticals' planned $75 million of seven-year convertible senior notes were seen at about 102 based on one market player's valuation, using a credit spread of 850 basis points over Libor, 40% vol. and a 2% stock borrow at the midpoint of talked terms.

The deal was talked at a 4.25% to 4.75% coupon and 22.5% to 27.5% premium.

"There is no borrow and it's very early stage biotech, so it's cheap, but it has to be," a Connecticut-based trader said.

Merrimack shares were seen down 25% during the session, and they closed down 28%.

"The stock has gotten really hit. There was no support for this deal at all," a trader said. He said that he has "seen deals pulled" under such circumstances, or the deal could be reworked, setting the conversion price higher and thereby raising the premium.

Merrimack is also planning to price $50 million of common stock with a $7.5 million greenshoe.

The registered, off-the-shelf convertibles deal has a greenshoe of $11.25 million and was being priced by joint bookrunners J.P. Morgan Securities LLC and BofA Merrill Lynch, with Cowen & Co. LLC acting as co-manager.

The bonds are non-callable for life with no puts. There is takeover and dividend protection.

Proceeds from both offerings will be used to fund research and clinical development and seek marketing approval for MM-398 for the treatment of metastatic pancreatic cancer.

The Cambridge, Mass.-based biopharmaceutical company is focused on cancer treatments.

Ascent Capital to price

Ascent Capital planned to price $90 million of seven-year convertibles with a $13.5 million greenshoe via joint bookrunners BofA Merrill Lynch, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC in a registered offering.

Proceeds will be used fund a portion of the purchase price of a previously announced acquisition of Security Networks LLC by Monitronics. If the acquisition is not completed for any reason, Ascent will use proceeds for general corporate purposes.

In connection with the offering, Ascent plans to enter into hedge and warrant transactions with counterparties that may include one or more of the underwriters.

The notes are non-callable for life with no puts. They have contingent conversion if shares rise to 130% of the conversion price. There is flexible settlement, and there is dividend and takeover protection.

Ascent Capital is a holding company with operating subsidiaries including home security alarm company Monitronics.

Stephanie Rotondo contributed to this report

Mentioned in this article:

Ascent Capital Group Inc. Nasdaq: ASCMA

D.R. Horton Inc. NYSE: DHI

Lennar Corp. NYSE: LEN

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

RadioShack Corp. NYSE: RSH

Vantage Drilling Co. NYSE: VTG

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.