New Fifth Street trades around par; Newmont Mining active, slightly better dollar neutral

By Rebecca Melvin

New York, April 7 - Fifth Street Finance Corp.'s newly priced 5.375% convertibles were steady and mostly quiet on their first day of trading in the secondary market Thursday, with the underlying shares dropping nearly 2% on the day.

"There was not a lot of activity in these," a syndicate source said of the business development company's new paper. "I think that everyone who wanted it got it. They traded right around par all day," the syndicate source said.

Other names in the same space were little changed. New York-based private equity firm Ares Capital Corp.'s 5.75% convertibles due 2016 were bid unchanged at 106.79 and Prospect Capital Corp.'s 5.5% convertible notes due 2016 were bid unchanged at 101.6, while Prospect's 6.5% convertibles due 2015 were steady at 108, according to a New York-based pricing source.

Newmont Mining Corp.'s three convertible bonds were all active and trading steady to slightly higher on a dollar-neutral basis as gold prices notched another consecutive record high, and after the Denver-based gold and copper producer announced Thursday it plans to boost gold output by 2017 by developing its global assets, and to double copper production to 400 million pounds.

Newmont also announced a new dividend strategy, which will tie a quarterly cash payout to the price of gold. That is contrary to most gold mining firms that tie dividends to cash flows or profits.

Newmont's plan is expected to take effect in June.

The price for the gold contract for April delivery rose 80 cents to a record front-month settlement of $1,458.50, on the Comex division of the New York Mercantile Exchange. The contract for June delivery also gained 80 cents to settle at $1,459.30.

LifePoint Hospitals Inc., which has been an active name of late, was quieter Thursday and steady to slightly lower as hedge players weigh the risks of losing on the paper's premium in the event of a takeover of this Brentwood, Tenn.-based rural hospital owner and operator.

Fifth Street seen around par

The market for Fifth Street's newly priced 5.375% convertibles was between 99.25 bid, 100.25 offered early in the session, with late bids also at 99.25, pricing sources said.

"They were wrapped around par," a syndicate source said to characterize the paper's debut.

Shares of the White Plains, N.Y.-based business development company ended down 26 cents, or 1.9%, at $13.16 on Thursday.

The $150 million issue of five-year notes priced at the cheap end of talk after overnight marketing to yield 5.375% with an initial conversion premium of 10%.

The deal was sold via J. P. Morgan Securities LLC, Morgan Stanley & Co. Inc. and Wells Fargo Securities LLC, and the notes are non-callable with no puts.

Proceeds will be used to reduce outstanding borrowings, to make investments in small and mid-sized companies and for general corporate purposes.

Fitch Ratings assigned the issuer and the issue an initial default rating of BBB- and said the outlook is stable.

Fitch said the ratings reflect Fifth Street's low leverage, strong asset coverage, improving asset quality, consistent operating performance in a difficult market environment, low exposure to more volatile equity investments, solid coverage of dividends from net investment income, demonstrated access to the capital markets and experienced management team.

The Fitch ratings consider the company's short operating history as a business development company, moderate investment concentrations within the health care sector, limited funding flexibility, dependence on the capital markets to fund portfolio growth and limited ability to retain capital due to dividend requirements.

Elsewhere in the space, the convertibles of Ares Capital and Prospect Capital were quiet.

"There are a few of these out there," a syndicate source said of issues of this stripe. But "none of them are too big, and they are held by similar-type customers who are not the type that will necessarily sell out of one name to get into another one."

"Does it change the valuation of the other ones? Sure. But our market still needs paper," the source said.

Newmont adds dollar neutral

Newmont Mining's 3% convertibles due 2012 were seen at 132 bid at the close compared to a 129 bid the previous day.

Newmont Mining's 1.25% convertibles due 2014, or A paper, were at 137.5 bid at the close, compared to a previous level of 134.7 bid; and the Newmont Mining 1.625% convertibles due 2017, or the B paper, were at the high mark for the three issues, at 142.26 bid, compared to 138.57 bid, previously, according to a pricing source.

The Newmont 1.25% convertibles and the Newmont 1.625% convertibles, or the A and B issues, were both seen higher by about 0.5 point dollar neutral, a New York-based sellside trader said.

A second source said that the Newmont 3% convertibles were 128.5 versus a share price of $56.50 on Thursday, while the "A" convertibles were 146 and the "B" convertibles were 129.35 versus the same $56.50 share price.

That's 6 points, 13.5 points and 17 points, compared to 5.9 points, 13.54 points and 17 points the previous session, a New York-based sellside desk analyst said, calling the paper about unchanged on hedge.

On Thursday, Newmont said it estimates its gold production of 5.1 million to 5.3 million ounces for 2011, and 190 million to 220 million pounds of copper.

2012 production was expected to be flat, but by 2017, Newmont plans to raise gold output by more than a third by developing its global assets, and to double copper production to 400 million pounds.

Also on Thursday, at its annual Investor Day conference, Newmont announced a new dividend policy that will link its quarterly dividend payment to Newmont's average realized price of gold sales.

The Newmont convertibles are dividend protected. "I think this was probably behind the Newmont action," a sellside analyst said.

LifePoint steady to lower

LifePoint's 3.5% convertibles due May 15, 2014 were seen at 106.79, with shares slightly weaker, at $39.69 at the close Thursday, according to a pricing source.

That level compares to Monday's 107 versus a share price of $40.19, according to another pricing source.

"If they got taken over, you would lose 5 points to 6 points on hedge," a New York-based sellside trader said. "The premiums are too high in the convert world. They are too high across the board."

A second sellsider said that at the current price on a 45% delta, a hedge player would lose 4.76 points at a $50 bid and 2.26 points at a $55 bid.

Shares of the Brentwood, Tenn.-based rural hospital owner and operator shed 58 cents, or 1.4%, to $39.69 on Thursday.

Most of the names in the health care space look like they are trading in anticipation of a merger or acquisition, a sellsider said.

"Everybody in Big Pharma is looking to buy the biotechs with some sort of product pipeline, and with the 30% to 50% takeover matrix, that's going to destroy hedged players," the sellsider said.

Other losers in a takeout besides LifePoint, the sellsider said, include Human Genome Sciences Inc.'s 2012 convertibles, Vertex Pharmaceuticals Inc., Hologic Inc. and Molina Healthcare Inc.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Fifth Street Finance Corp. NYSE: FSC

LifePoint Hospitals Inc. Nasdaq: LPNT

Newmont Mining Corp. NYSE: NEM

Prospect Capital Corp. Nasdaq: PSEC

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