Ares Capital, Apollo mostly flat on debuts; Apollo remarketed at 98.5; MannKind plunges

By Rebecca Melvin

New York, Jan. 20 - The two new issues released for secondary dealings Thursday in the convertible bond market were both five-year notes with 5.75% coupons and 17.5% initial conversion premiums and issued by New York-based business development companies.

Ares Capital Corp. priced an upsized $500 million of 5.75% convertible senior notes late Wednesday, which hung right around par on their debut in trade on Thursday; and Apollo Investment Corp. priced an upsized $175 million of 5.75% senior convertible notes early Thursday that stayed right around their remarketed price of 98.5.

"That wasn't a coincidence," a New York-based syndicate source said of the two deals' similarities. "These two companies are direct competitors, and represent the big gorillas in their space. They have similar ratings, similar market caps. You've got to assume that both were trying to get to market first, and when Ares did, Apollo looked to see what investors were willing to pay."

Back in established issues, MannKind Corp. saw its two convertible issues tumble along with a 35% plunge in the underlying shares on news that the Valencia, Calif.-based biopharmaceutical company's inhaled insulin product Afrezza has been rejected by the U.S. Food and Drug Administration for the second time.

DryShips Inc.'s convertibles extended losses following a slide Wednesday as the underlying shares remain under pressure following enthusiasm for the shares that took them sharply higher in November and December.

One sellsider said the DryShips bonds traded at 98.5 versus a share price of $5.00, and Trace data had them lower in the 97 context. Previously they were well above par.

Overall, Thursday's market was described as mixed, as sellers stepped into the equity markets early amid worries over China's possible monetary tightening in the face of its rapidly expanding economy, which grew by 9.8% in the fourth quarter.

Apollo reoffered at 98.5

Apollo's newly priced 5.75% convertibles due 2016 traded a lot between 98 bid, 98.5 offered, which was at or slightly below their reoffered price of 98.5, several sources said.

The new convertibles were also seen a tad lower at 97.75 bid, 98.375 offered; and one source called them 98 bid, 98.375 offered, while yet another source said the notes were 0.25 point plus or minus from issue.

Apollo's was an overnight deal that came at a discount, lifting the paper's yield from the investors' perspective to about 6.1% and lowering the premium.

The Apollo deal also has a dividend cap, which if triggered lowers the conversion price of $13.75.

Because the deal was only launched after the market close on Wednesday, shares of the New York-based closed-end investment company took a hit on Thursday as investors reacted. The stock settled at $11.26, which was down 34 cents, or nearly 3%.

The Rule 144A offering was upsized to $175 million from an initially talked $150 million, and it came at the talked price points. Morgan Stanley & Co. Inc. and RBC Capital Markets Corp. were the joint bookrunners of the deal.

Proceeds will be used to fund new portfolio investments, to reduce outstanding borrowings under the company's revolving credit facility and for general corporate purposes.

One sellsider called the debut action of Apollo and Ares "boring" because pricing didn't move very much.

"Not much excitement when they don't move," the sellsider said.

Ares trades around par

Ares Capital's newly priced 5.75% convertibles due 2016 traded around 99.75 bid, 100.25 offered but were not overly active. The offering had seen a lot of outright interest.

Shares of the New York-based private equity firm shed just 15 cents, or 0.9%, to settle at $16.13, after taking a hit Wednesday when the deal was launched.

The offering of five-year convertibles was upsized to $500 million from an initially talked $300 million, and the talked coupon was tightened to 5.75% to 5.875% from 5.75% to 6.25%, with the premium adjusted to 17.5% to 20% from 17.5% to 22.5%.

Fitch Ratings said it assigned a rating of BBB to the Ares convertibles. Its existing ratings include a long-term issuer default rating of BBB, senior secured debt rating of BBB and senior unsecured debt rating of BBB. Allied Capital Corp. has a senior unsecured debt rating of BBB.

The outlook is stable, Fitch said.

One sellsider said that that deal was "not his cup of tea" and that it wasn't the kind of deal that a lot of hedge players get involved in.

Prospect Capital eyed

The Ares and Apollo deals follow on the successful pricing by Prospect Capital Corp., another New York venture capital and private equity firm, albeit smaller than Apollo and Ares. Prospect's deal priced in December.

Prospect Capital sparked interest among these types of companies, a second New York-based syndicate source said. The firm priced $150 million of five-year convertibles with a 6.25% coupon and a 10% premium.

Will there be more of these types of companies pricing deals? Possibly, but these two were among the main fish to fry, and whether smaller, lesser rated companies of this ilk will find it worthwhile coming to the convertible market remains to be seen, a New York-based sellsider said.

Prospect also has a dividend cap. But Ares doesn't, which means that investors don't have to bare that risk that dividends might rise and trigger the cap.

Also last year, another deal of this type was Annaly Capital Management Inc.'s 4% convertibles of which $500 million were priced in February, with another $100 million add on in March.

"That was another deal like this that did very well," a sellsider said. It was done cheaper and it doesn't have a rating, it also has a dividend cap, but that adjustment is done every time the dividend is paid out.

As for Thursday's deals, one sellsider said: "I think it's a good sign. These two BDCs are in the business of investing in bonds and loans, and they think the space is a good place to be. These are former bankers and things and these people are venturing into the convert market, being opportunistic."

MannKind tumbles

MannKind's newer 5.75% convertibles were down as much as 50 points to 95 from 145 on Thursday, while the older MannKind 3.75% convertibles were down about 10 points or so to 57 from 68, a sellsider said.

There was also a print of the older 3.75% convertibles at 52, but most of the trades in the older paper were done in the 57 bid, 58 offered context, a second sellsider said.

MannKind's stock fell as much as $4, but pared losses for a nearly $3 slide by the end of Thursday to settle at $6.17, which was down 32%.

The tumble was painful for outrights, and not really measurable for players hedged to the common since the stock borrow has not been good, sources said.

"People could only hedge with options, which were way rich, so I don't know how they did," a New York-based sellside trader said.

Hedge players would have had to have been hedged by as much as a 95% delta to make any money in either convert, and given that the stock borrow was poor, it was unlikely that investors were hedged in that way.

A second New York-based sellside trader said, "It's hard to talk about nuking because the borrow is so hard and it's so busted."

The FDA has asked MannKind to perform more trials of an inhalation device that the company introduced after conducting studies using a previous one. The FDA action may put off potential approval of the drug for another 18 months to 24 months.

"This one has been a crapshoot for some time and I think people viewed it as such," a sellsider said regarding investors' view of the MannKind convertibles.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Apollo Investment Corp. Nasdaq: AINV

Ares Capital Corp. Nasdaq: ARCC

DryShips Inc. Nasdaq: DRYS

MannKind Corp. Nasdaq: MNKD

Prospect Capital Corp. Nasdaq: PSEC

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