New Qihoo gets warm reception, trades up despite lower shares; Accuray up after earnings

By Rebecca Melvin

New York, Aug. 28 - Qihoo 360 Technology Co. Ltd.'s newly priced 2.5% convertibles jumped on their debut in the secondary market Wednesday after the Beijing-based PC and mobile internet-security company priced $550 million of the five-year notes at the midpoint of talk in an overnight deal.

The new Qihoo convertible ended the session at 105 bid, 106 offered versus a closing underlying share price of $77.80, a syndicate source said. Shares ended down nearly 2% on the day.

Back in the secondary market, Accuray Inc.'s older 3.75% convertible of 2016 traded higher by about 2.5 points to 3 points with the underlying shares jumping 11% after the Sunnyvale, Calif.-based radiation oncology company reported quarterly results that showed an increase in orders.

The Accuray quarterly report also included revenue guidance for 2014 that was below estimates, but the important thing was that the company showed that it is "stabilizing and getting back on track," an East Coast-based buysider said.

Gold remained a focus, although prices edged lower with equity markets higher.

Goldcorp Inc. was still steady in trade, with the 2% convertibles at 102 to 102.375. Newmont Mining Corp.'s 1.625% convertibles due 2017 also traded and were up about 0.25 point to 0.375 point to 116, according to Trace data.

Overall, Qihoo was the name of the day, with trade volumes otherwise light as the countdown to Labor Day continued. Uncertainty about the geopolitical situation in Syria and the likelihood of imminent U.S. military action was also a feature of the market and kept some players on the sidelines.

Equities recouped some of Tuesday's sharp losses. The Dow Jones industrial average added 48.38 points, or 0.3%, to 14,824.51, following a 170-point, or 1%, slide on Tuesday. The S&P 500 stock index added 4.48 points, or 0.3%, to 1,634.96, and the Nasdaq stock market added 14.83, or 0.4%, to 3,593.35.

Qihoo jumps on debut

Qihoo's newly priced 2.5% convertibles due 2018 were seen last at 105 bid, 106 offered with the underlying shares at $77.88, according to a syndicate source.

That represented an exceptionally good debut since shares were quite a bit lower early in the session.

"They did very well," the syndicate source said.

Earlier, the new paper had popped up to 104 bid, 104.5 offered versus an underlying share price of $74.47. It then eased back to trade at 103.4 versus an underlying stock level of $74.33. And then it was seen around 105 with shares in the area of $77.75.

On a dollar-neutral, or hedged, basis, the paper was seen to have expanded about 4 points, given a delta of about 50%, the syndicate source said.

An East Coast-based buysider said, "It set up nicely. I tend to think some of it is that the stock has had such a run, the vol. may be higher going forward."

Last fall, the stock was in the $20.00 range. On Wednesday, shares tanked in the early going by $5.57, or 6.9%, to $73.79, and it had been as much as 7.6% lower.

On a valuation basis, the deal had a theoretical value of 105.7 using a credit spread of 600 basis points over Libor and a 40% vol., according to one source.

The underwriters were said to be going out with a much tighter credit spread of about 400 bps over Libor, but sources said that spread was too aggressive.

"That basically discounts the China risk here; and while this is a good sector and a real company with fundamentals that can be actually tracked and verified, I don't think anyone will just ignore the China risk. Libor plus 600 is far more appropriate, but with technology companies with good cash flows, some people will be more aggressive in terms of credit assumptions," the buysider said. But he added that even at the higher spread, the deal looked like it was attractively priced.

Qihoo priced $550 million of five-year convertible senior notes at par to yield 2.5% with an initial conversion premium of 40%.

Pricing of the Rule 144A and Regulation S offering came at the fixed coupon price talk and at the midpoint of 35% to 45% premium talk.

There is a $50 million greenshoe.

The deal was sold via Citigroup Global Markets Inc., China Renaissance and UBS as joint bookrunners.

The notes will be convertible into the American Depositary Shares of the Beijing-based company, with every two ADS representing three class A ordinary shares.

The notes are non-callable until Sept. 20, 2016 and then are provisionally callable if the underlying shares exceed 130% of the conversion price. There is an investor put on Sept. 15, 2016.

There is standard dividend and takeover protection.

Proceeds are earmarked for general corporate purposes.

'China is back'

The positive response to Qihoo's convertible was contrary to what has recently seemed true for China-based issuers and caused one New York-based sellsider to pronounce, "China is back," via an e-mail after the deal was launched.

For some time, deals from companies domiciled in China looked like second-class securities, and people avoided them, a New York-based trader said.

But in reality the approach of investors to new deals has been more even-handed. "It's got to be the right company, and a good sector. Do you look for another China forestry company? No, it's probably not going to happen. But for a visible company with a partner in Google, it works," a buysider said.

The buysider was referring to Sino-Forest Corp., which turned out to be a black eye for the convertible bond market in 2011 when the Toronto-listed Chinese commercial forest plantation melted down and declared bankruptcy after allegations of fraud by research firm Muddy Waters Research.

Accuray up on stable quarter

Accuray's 3.75% convertibles due 2016 traded at 100.75 with the underlying shares up at $6.80.

Previously the bonds were wrapped around 98, but had not really traded there, a market source said.

"That's a decent 2.5 point to 3 point move on an 11% move in the stock," the market source said of the issue, which was priced in 2011 and is the older of two Accuray convertible bonds.

Accuray shares closed down from that 11%, but still strong at $6.65, which was up $0.55, or 9%.

The 3.75% convertibles now have a better profile than they did, a buysider said. Previously they traded as a yield name following a sharp pull back in the shares earlier this year.

At that time the viability of the company was being questioned and the bonds fell to about 87.

They yielded about 8.5% then. They still have a decent yield and the premium is more realistic, so they are more balanced, the buysider said.

Still, these bonds have soft call protection starting August 2014, and if the underlying shares were to rise to 130% of the conversion price, this source thinks holders would "gladly trade them in" given risk still out there related to the company.

The newer Accuray 3.5% convertibles due 2018, which priced in February, were seen at 142 bid, 142.5 offered, with the stock at $6.80.

The high-delta convertible is more equity sensitive.

"Frankly if you have a choice of playing the stock or these, I would pick these," a buysider said.

The latest quarterly results, which included a narrower-than-expected loss, "reiterated that the company is stabilizing and back on track. It's the second quarter in a row that management has come through," the buysider said.

For its fiscal fourth quarter ended June 30, Accuray reported a net loss of $18.7 million, or $0.25 per share, compared to $20.3 million, or $0.28 per share in the year-earlier quarter.

Accuray also announced continued strength in new orders booked in the fourth quarter and first patients treated in the United States with the new CyberKnife and TomoTherapy systems as well as continued financial discipline, operating expense control and decreased operating loss.

Looking ahead, Accuray management projects total revenue for fiscal 2014 of $325 million to $345 million. Analysts were looking for revenue of $359.6 million on average.

Mentioned in this article:

Accuray Inc. Nasdaq: ARAY

Goldcorp Inc. NYSE: GG

Newmont Mining Corp. NYSE: NEM

Qihoo 360 Technology Co. Ltd. Nasdaq: ADS: QIHU

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