Stewart flat, Dollar Financial gains slightly, NovaMed quiet on dull debuts; PrivateBancorp falls with stock

By Kenneth Lim

Boston, June 22 - Stewart Enterprises Inc. made a flat debut on Friday characteristic of a lackluster day for new issues amid general cautiousness and the usual summer doldrums.

Dollar Financial Corp. improved slightly with its deal seen as fairly attractive although volume also remained thin.

NovaMed Inc. stayed silent on its first day of trading even though the deal was upsized, meeting expectations that the small deal would not be active.

PrivateBancorp Inc. fell outright with its stock a day after the company warned that business would not be as good as expected, although the company's credit is widely seen to have held better than the stock.

The convertible market was mostly quiet on Friday. One reason for the uneventful session was the usual summer slowdown.

"That's Fridays in the summer," a sellside convertible analyst said. "The BX IPO, Blackstone, got guys pretty busy in the morning, but once that started trading, all the big shots left the floor and it's been quiet since then."

A convertible trader said there was "a lot of worrying" as well because of trouble at Bear Stearns' High-Grade Structured Credit Fund, which will receive a $3.2 billion secured loan bailout from the bank. The Bear Stearns fund does not hold convertibles, but its problems were expected to affect the high-yield market, which has "crossover" investors, the trader said.

"With junk bonds being weak, your crossover guys in converts will be affected," the trader said. "In theory, if some single B piece of paper was going to go at a 6% yield to put, those guys aren't in shape to step in to take these up. You only have the outright convert guys stepping in. When they break down and the market looks like crap, I think there's a little worry that the market really craps out and equities follow and their bond floors may be a little wider than expected."

Stewart climbs slightly

Stewart's new 3.125% convertible senior note due 2014 and 3.375% convertible senior note due 2016 were lower outright but slightly better dollar-neutral on Friday amid a weak stock.

The seven-year convertible traded at 97.75 against a stock price of $7.95 while the convertible due 2016 traded at 97.5 versus the same stock price. Stewart stock (Nasdaq: STEI) reached as low as $7.89 during the day but had a slight recovery in the afternoon before finishing at $8.21, down by 1.56% or 13 cents.

"It was kind of a dud," a hedge fund trader said. "It traded up about an eighth of a point [dollar-neutral], but the stock's getting whacked. It's down outright, but it was OK on swaps because it came on a full happy meal."

Stewart Enterprises priced the $250 million two-tranche offering Thursday after the market closed. The $125 million seven-year series priced at an initial conversion premium of 32.5% while the equally sized nine-year tranche arrived at an initial conversion premium of 32.5%.

The seven-year notes were talked at a coupon of 2.875% to 3.375% and an initial conversion premium of 30% to 35%, and the nine years were talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 30% to 35%.

The convertibles were offered at par.

There is no over-allotment option.

Banc of America and Merrill Lynch were the bookrunners of the Rule 144A offering.

Stewart, a Jefferson, La.-based provider of funeral and cemetery products, said it will use the proceeds to fund convertible note hedge and warrant transactions. It will use $165 million of the proceeds to prepay the remaining balance of a term loan and use $64.2 million to buy back its own stock.

Dollar Financial gains slightly

Dollar Financial's new 2.875% convertible senior note due 2027 also had a modestly positive debut, gaining less than a point on light trading although its deal was seen as cheap.

The convertible was offered at 100.35 against a stock price of $29.05 in the afternoon but was seen bid at 100.25 earlier in the day. The convertible was offered at par. Dollar Financial stock (Nasdaq: DLLR) eased 1.3%, or 38 cents, to close at $28.90.

Dollar Financial priced the upsized $175 million offering at an initial conversion premium of 32.5% on Thursday after the market closed. The deal was talked at a coupon of 2.5% to 3% with an initial conversion premium of 30% to 35%.

The size of the deal was originally $150 million with an over-allotment option for a further $22.5 million. The greenshoe is now an additional $25 million.

Bear Stearns and Wachovia were the bookrunners of the Rule 144A offering.

Dollar Financial, a Berwyn, Pa.-based provider of financial services to "under-banked" customers, said it will use the proceeds of the deal to repay an outstanding revolving loan, to fund general purposes and to possibly repay other outstanding debt.

Some observers noted that the inherent risks involved in lending money to under-banked customers may have affected the attractiveness of the deal, but that would also explain the cheapness of the offering.

"The pricing was pretty good," a convertible analyst said. "I thought it was reasonably good. It modeled a couple of percent cheap there. It's a story that's got some hair on it but I think that's reflected in the pricing."

NovaMed makes silent entrance

NovaMed's new 1% convertible senior subordinated note due 2012 did not appear to trade on the Street Friday, but traders said the deal will probably never see much action.

"It's a really small company, so you probably won't see a lot of trading in the name anytime soon," a sellside convertible trader said.

NovaMed priced the upsized $75 million deal with an initial conversion premium of 15%. The convertibles were offered at par. The deal was talked at a coupon of 0.5% to 1% and an initial conversion premium of 15% to 20%. NovaMed stock (Nasdaq: NOVA) closed at $5.67, up by 2.35% or 13 cents.

The size of the deal was originally $52.5 million with an over-allotment option for an additional $7.5 million. The over-allotment option was immediately exercised.

Deutsche Bank is the bookrunner of the registered offering.

NovaMed, a Chicago-based health care services company that operates surgical facilities, said $10 million of the proceeds will be used to fund the convertible note hedge and warrant transactions while the remaining will be used to partly repay an outstanding $125 million of debt.

PrivateBancorp slips further

PrivateBancorp's 3.625% convertible due 2027 declined further on Friday as a performance warning earlier in the week continued to drag the stock lower.

The PrivateBancorp convertible was 1.5 points lower outright, trading at 96.75 bid, 97.5 offered against a stock price of $27.92. PrivateBancorp stock (Nasdaq: PVTB) fell 5.36%, or $1.61, to close at $28.42.

"They've been pretty active as of late," a convertible trader said. "The company gave guidance on some business trends going forward and they had high non-performing assets and interest expense. My interpretation of what my equity analyst is saying is that this is overdone. I still like the credit here, but some guys don't, so there's good two-way flow on that. But I like them. They're fairly short-dated with less than two years to the put and it's a bank with a relatively low subprime exposure."

PrivateBancorp, a Chicago-based bank that focuses on private banking services, on Thursday said its non-performing assets increased to around 0.7% of total assets from 0.34% at the end of the first quarter. The company also guided for a lower net interest margin of about 3.16% from the first quarter's 3.26% and expects to increase its loan loss provision.

"They didn't put it into specific EPS guidance, but they issued several data points on what they expected going forward and they were all adverse developments with a few exceptions," a convertible analyst said. "I don't necessarily think there's any ramifications for the credit, though. They're still a good company. I think they're going to continue to be OK.

"[The company] will be prudently run even though you might see some deterioration in the credit metric and the quality of their loan book. It's not going to be that negative, and I think they still have a group of borrowers that's better than the average."

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