Planned PennyMac seen fair value to slightly cheap; Nuance trades in line; Supernus on tap

By Rebecca Melvin

New York, April 24 - PennyMac Mortgage Investment Trust's planned $200 million of seven-year exchangeable senior notes looked to be fair value to slightly cheap ahead of final terms expected to be fixed after the market close, market players said Wednesday.

Despite the PennyMac convertibles' attractive 5.25% to 5.75% coupon, the common stock has a big dividend yield, making it difficult to hedge the new deal because of "poor cash flow characteristics," a New York-based analyst said.

The planned security was seen only 100.25 bid, 100.75 offered in the gray market ahead of pricing, a Connecticut-based trader said.

Elsewhere, Nuance Communications Inc.'s convertibles were trading higher in line with the underlying shares of the Burlington, Mass.-based speech-recognition software firm after a report that the company has hired Goldman Sachs as an adviser, a move seen as being connected to billionaire investor Carl Icahn's recent stake taken in the company.

Iconix Brand Group Inc.'s older convertible bonds due 2016 were trading a point higher on an outright basis at about 110.5 after the New York-based consumer brands marketing company reported positive earnings. The newer Iconix bonds were trading close in price at 109, but not as actively, a New York-based convertibles analyst said.

Meanwhile, Prologis Inc.'s convertibles were in trade after the San Francisco-based real estate investment trust reported decent earnings and later announced a common stock offering for 31 million shares.

SunPower Corp.'s convertibles were up nearly a point at 101.825, according to Trace data, while shares of the San Jose, Calif.-based solar power company jumped 10% as the solar sector gained strength following a report suggesting European solar demand is improving.

In the primary market, Supernus Pharmaceuticals Inc. launched an offering of $75 million of convertible senior notes due 2019 after the market close Wednesday. The deal was seen pricing after the market close on Thursday.

Equities ended mixed amid a raft of earnings reports and economic news that showed a 5.7% drop in March U.S. durable goods orders. The drop in orders was more than expected. The Dow Jones industrial average lost 43.16 points, or 0.3%, to 14,676.30; but the S&P 500 index ended unchanged at 1,578.79, while the Nasdaq stock market was also little changed, adding less than a point to 3,269.65.

PennyMac fair to cheap

PennyMac Mortgage's planned $200 million of seven-year convertibles was seen about fair value using a credit spread of 425 basis points over Libor and a 19% vol., according to a Connecticut-based trader.

A second source said that his valuation made the bonds 1.8 points cheap using a wider spread and 20% vol.

The underwriters used a credit spread assumption of 450 bps over Libor and a 19% vol.

PennyMac, a Calabasas, Calif.-based real estate investment trust, plans to price the convertibles with a coupon in the range of 5.25% to 5.75% and an initial conversion premium of 20% to 25%.

"The coupon has to be higher to offset what you're paying out in dividend. For the same terms, and using the same assumptions, the one with the lower dividend yield will be cheaper," a Connecticut-based trader said.

The deal, expected to price late Wednesday, has a $30 million greenshoe. The convertibles are non-callable, and there is standard takeover protection, and dividend protection in the form of a conversion rate adjustment for dividends paid above $0.57 quarterly.

Credit Suisse Securities (USA) LLC, BofA Merrill Lynch and Citigroup Global Markets Inc. are the joint bookrunners.

Proceeds are expected to be used to acquire distressed mortgage loans, to develop correspondent lending business, to repay debt and for general corporate purposes.

Nuance trades in line

Nuance's 2.75% convertibles due 2031 traded at 109 versus an underlying share price of $22.22.

The bonds trade on about a 43% delta.

Nuance's 2.75% convertibles due 2027 traded at 132.408 versus a share price of $22.21, and those bonds move on a 70% delta.

Nuance shares were essentially flat early in the session but rose after a report that the company is seeking advice from Goldman Sachs. Shares ended up 92 cents, or 4.3%, to $22.27.

Both convertibles "looked roughly in line," a New York-based trader said.

"The bonds are basically unchanged; people are buying it for the credit. The common is up, but Icahn can come and go," a second New York-based source said.

The newer 2031 convertible, with the lighter delta, was the more actively traded issue.

Old Iconix adds a point

Iconix's older 2.5% convertibles due 2016 traded at 110.335 versus an underlying share price of $25.76 during the session, which was up 1 point on the day on an outright basis, according to a New York-based trader and Trace data.

The newer Iconix 1.5% convertibles due 2018 traded around 109.

Shares of the New York-based consumer brands marketing company rose 81 cents, or 3.2%, to $25.83 in strong volume.

Iconix reported earnings before the market open that beat estimates and revenue that was in line. It guided for full-year earnings per share above consensus estimates and reaffirmed full-year revenue guidance.

Net income for the first quarter was $36.2 million, or $0.54 per share, compared to $31.9 million, or $0.43 per share, in the year-earlier quarter.

Revenue was $64.6 million, which was up 14% from $56.8 million in the year-earlier quarter.

Looking ahead, the company raised its full-year earnings guidance to $2.10 to $2.20 per share, up from $2.05 to $2.15 per share, and maintained 2013 revenue guidance of $425 million to $435 million.

The two convertible bonds were trading close together in terms of price. The older 2.5% convertibles due 2016 were trading around 110.5 versus an underlying share price of $26.14, which was up a point on an outright basis, while the newer Iconix 1.5% convertibles due 2018 were trading at 109 versus the same stock price of $26.14.

Supernus to price

Supernus, a specialty pharmaceutical company based in Rockville, Md., planned to price $75 million of convertibles due 2019 that were talked to yield 7% to 7.5% with an initial conversion premium of 15% to 20%.

The Rule 144A deal has a $15 million greenshoe and was being sold via joint bookrunners Jefferies & Co. and Piper Jaffray & Co.

Supernus focuses on treatments of central nervous system diseases, including epilepsy.

Mentioned in this article:

Iconix Brand Group Inc. Nasdaq: ICON

Nuance Communications Inc. Nasdaq: NUAN

PennyMac Mortgage Investment Trust NYSE: PMT

Prologis NYSE: PLD

SunPower Corp. Nasdaq: SPWR

Supernus Pharmaceuticals Inc. Nasdaq: SUPN

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