New PHH surges out of the chute; existing PHH convertibles improve; NuVasive up on hedge

By Rebecca Melvin

New York, Jan. 11 - PHH Corp.'s newly priced 6% convertible due 2017 jumped strongly in active trade on Wednesday in an unreservedly positive debut in secondary market trading.

The strong action was in contrast, for example, to what happened with the new Amarin Corp. plc deal, which dropped below par in thin trading on its debut a week ago.

The new PHH was at 109.125 versus an underlying share price of $10.75 late in the session. Part of that jump was due to the gains in the underlying shares, which were up 5%. But the move was still 5 or 6 points up on a dollar-neutral, or hedged, basis, according to one sellsider.

A second sellsider said he thought the deal was up about 3.25 points on a dollar-neutral basis taking a swap trade on an 80% delta at 106.505 versus an underlying share price of $10.75.

The paper did surprisingly well, some said, especially in light of ratings agencies' actions Tuesday, which put out negative credit watch notices on the company. And PHH received an actual downgrade by Standard & Poor's in December.

Nevertheless, the BB credit company priced paper that was extremely cheap, and the paper-starved convertible market was happy to receive it.

"Almost the whole deal has turned over," a New York-based trader said, noting that $183 million of the $220 million deal had changed hands on its first day trading, according to Trace data.

PHH's existing convertible bonds were also active again and extended gains notched Tuesday on an outright basis after the Mt. Laurel, N.J.-based mortgage, lending and fleet services company launched the convertible senior notes offering.

Elsewhere, NuVasive Inc. was trading up by about 0.5 point on a dollar-neutral basis after the San Diego-based medical device company unveiled some positive developments, including 2011 revenue at the top end of guidance, at the J.P. Morgan health care conference going on this week in San Francisco.

Alcatel Lucent SA's B convertibles, or the 2.75% convertibles of 2025, were also active and up on the day by about 1.5 points last to 89.5.

Traders said the market is doing better to start 2012 than it was ending 2011.

"Volumes are better; things are better to buy," a sellside trader said. "High-yield type converts are moving up, playing catch up with the high-yield market."

In general, many high-yield names are up between 0.25 point and 0.5 point, he said.

New PHH zooms up

PHH's newly priced 6% convertibles due 2017 were seen at 109.125 versus an underlying share price of $10.75 late in the session Wednesday. The paper jumped out of the chute at 103 to 104 and moved higher from there.

A lot of the move was chalked up to a bounce higher in the underlying shares. But also the paper was priced very cheaply and the combination contributed to an 8- to 9-point price move outright.

Shares of the company bounced back up as much as 60 cents, or more than 5%, on Wednesday, and settled up 47 cents, or 4.6%, at $10.70 after dropping hard on Tuesday.

The stock slumped Tuesday after the company revealed the need for debt financing, and the reason seen for its move back up on Wednesday was the fact that PHH's financing concerns were alleviated with the deal getting done and being upsized by nearly 50%.

PHH priced an upsized $220 million of 5.5-year convertible senior notes at par late Tuesday to yield a coupon of 6% with an initial conversion premium of 25%, according to a term sheet.

Initially the registered deal was going to be $150 million in size.

The deal priced at the cheap end of talk, which was for a 5.5% to 6% coupon and a 25% to 30% initial conversion premium.

There's an upsized $30 million greenshoe on the offering that was underwritten by J.P. Morgan Securities LLC and Bank of America Merrill Lynch.

Co-managers of the registered deal were Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., RBC Capital Markets, LLC and RBS Securities Inc.

"It was well priced and there is a lack of cheap paper out there, so people were willing to do it," a market player said.

He noted that the stock run was a good part of the move because there are so many shares underlying each bond, because the stock price is very low.

The new paper reacted better than many recent new deals, not because the company is a better credit, but because the company was in dire straits with being able to cover its upcoming debt maturity and had its back against the wall, so to speak, sources said.

Proceeds of the offering, along with cash on hand and proceeds from a recent reopening of its 9.25% senior notes, will be used to repay prior to or at maturity $250 million of its 4% convertibles due April 15, 2012.

Pending that use, proceeds may also be used to originate mortgage loans or to invest temporarily in short-term interest-bearing investment funds or similar assets.

"They had to do this [pricing], because the underwriters wouldn't have been able to place this without hedge funds," a market source said.

In its term sheet for the new convertibles, the company listed recent developments including Fitch Ratings' announcement Tuesday that it has placed PHH's long-term issuer default rating and senior unsecured rating on rating watch negative. Also on Tuesday, Moody's Investors Service affirmed PHH's senior unsecured debt rating and corporate family rating and its commercial paper rating but changed its outlook for PHH's senior unsecured debt and corporate family ratings to negative from stable.

The new senior notes, which mature June 15, 2017, will be non-callable. They will have takeover protection.

Existing PHH steady to higher

PHH's 4% convertibles due 2014 traded higher to 83 or 84 on Wednesday from 80 to 81.5 on Tuesday.

The PHH 4% convertibles, which mature April 15, 2012, traded up another point to par.

Market players used credit spreads on the existing paper to help value the new paper.

One analyst saw the PHH 4% convertibles of 2014 with a pretty tight spread. He saw the spread on the 4s of 2014 closer to the PHH 9.25% straight notes that using a price of 90 have a spread of 1,175 bps over Treasuries.

In comparison, others used a spread of between 1,250 bps to 1,500 bps.

NuVasive adds

NuVasive's 2.75% convertibles due 2017 were well bid and traded up to 75 bid, 75.75 offered and were better by about 0.5 point delta neutral, depending on the delta, a New York-based trader said.

NuVasive's 2.25% convertibles due 2013, a lot of which have been bought back by the company, aren't traded as frequently and weren't heard in trade.

NuVasive shares gained $1.82, or nearly 15%, to $14.12 in active trade.

"There was buzz around NuVasive today, which presented at the J.P. Morgan conference," the trader said.

Not only did the medical device company report positive revenue numbers, but it said that it has a Jan. 24 court date at which time it should have an answer on the patent infringement lawsuit brought against it by Medtronic Inc.

"There are a lot of catalysts for this name, and it's been under pressure for some time, but it's got some wind behind it," the trader said.

Mentioned in this article:

Alcatel-Lucent SA NYSE: ALU

Amarin Corp. plc Nasdaq: AMRN

NuVasive Inc. Nasdaq: NUVA

PHH Corp. NYSE: PHH

© 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.