Renewable Energy up despite lower shares; Spectranetics adds with stock; traders mark month end

By Rebecca Melvin

New York, May 30 - U.S. convertibles traded quietly on Friday as market players focused on the new deals that priced toward the end of the holiday-shortened week but were otherwise occupied marking their books for month end, sources said.

Renewable Energy Group Inc.'s newly priced 2.75% convertibles traded higher even though the company's stock was declining. The Ames, Iowa-based biodiesel producer priced $125 million of the five-year senior notes at the rich end of talk late Thursday. The new bonds were "trading between 102 and 103ish," a market source said, with the underlying shares lower by about 1.5%.

Spectranetics Corp.'s 2.625% convertibles, which debuted in the market on Thursday, were trading at 103.5 bid, 104 offered with the shares at $22.10. That compared to 102.5 bid, 103.5 offered with the underlying shares at $21.84 late Thursday.

Spectranetics' shares were up by about 0.5% in the early going but slipped into negative territory and ended down 40 cents, or 1.8%, to $21.44, while the bonds were seen at 103.5 at the close.

New Mountain Finance Corp.'s new 5% convertibles were quiet. The New York-based investment company priced $100 million of the five-year convertibles late Wednesday.

The week's deals

The week's new issues "were very different deals," an East Coast-based buysider said. "Spectranetics was an equity story and it either works or it doesn't. It priced on the rich end, and everyone still liked it."

He said that market players were divided on whether they liked the acquisition that the company is undertaking with funding from the convertible deal.

The deal's strong first-day performance was to a large extent a technical factor related to it being a smaller deal, he said. Smaller deals tend to pop a little more as market players try to figure out how the issue is going to trade.

In addition, Spectranetics is a medical devices company and that sector has performed well in the last month or two. But at the same time, it has something of a biotech flavor and had to be priced accordingly, or cheaply, he said.

"The primary market comes a little cheap to the secondary market," he said.

New Mountain is in a sector that is well represented in the convertibles market, namely business development companies, or BDCs. "A lot of BDCs have come in this space, and I think this is one of the better ones, but they are unrated" so that curtails some of the market interest from funds that require investment-grade securities, he said.

These names aren't generally overly compelling to hedged players given that upside participation is limited on the equity side and if rates tighten or the companies suddenly find it difficult to put money to work and credit deteriorates, "you're taking downside risk in the equity and you'll never get that back," a market source said.

The company's stock already yields a lot via the dividend so is not likely to rise very soon. Buying the convertibles versus the stock, the buysider said: "You're going to lose value on the dividend, but if you want a nice, relatively safe 5% yield, this is a way to do it."

Renewable Energy was a name that he felt was too risky given that the biodiesel space is closely tied to regulatory policy.

Equities ended mostly higher after dragging in the middle of the session. The Dow Jones industrial average and the S&P 500 stock index edged up to record highs to conclude the week and the month.

Renewable Energy trades up

Renewable Energy's newly priced 2.75% convertibles traded up to the 102 to 103 area even though the stock was lower.

Renewable Energy shares ended down 12 cents, or 1.2%, to $9.89.

Earlier in the session a syndicate source said the convertibles were at 102, and a trader said he saw them at 103.25 versus an underlying share price of $9.81.

"I thought it was small and not worth the risk, but obviously other people thought differently," a buysider said.

"The company sector in biodiesel production relies on regulatory support," he said.

Pricing of the registered, off-the-shelf deal came at the rich end of talk, which was for a 2.75% to 3.25% coupon and a 27.5% to 32.5% premium.

There is a greenshoe for $18.75 million for the deal that was sold via bookrunning managers BofA Merrill Lynch and Wells Fargo Securities LLC.

The bonds are non-callable, with no puts and standard takeover protection. The company also entered into capped call transactions with the underwriters or their affiliates. The capped call pertains to 92.5% of the shares underlying the bonds.

About $100 million of proceeds will be used to replace a letter of credit that guarantees the Gulf Opportunity Zone bonds issued in connection with the Louisiana-based Dynamic Fuels LLC biorefinery or to redeem those bonds.

Proceeds will also be used to pay the cost of capped call transactions, with remaining proceeds for general corporate purposes.

Mentioned in this article:

New Mountain Finance Corp. Nasdaq: NMFC

Spectranetics Corp. Nasdaq: SPNC

Renewable Energy Group Inc. Nasdaq: REGI

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