Radian surges in active debut; Starwood adds after earnings; Cobalt up slightly on hedge

By Rebecca Melvin

New York, Feb. 27 - Radian Group Inc.'s newly priced 2.25% convertibles jumped in secondary market action Wednesday after the upsized $350 million offering of six-year convertibles priced on the rich end of revised terms late Tuesday.

Later Wednesday, the company announced that a $50 million greenshoe had been exercised in full, raising the Radian deal size to $400 million.

On an outright basis, the new Radian convertibles were up better than 5 points, while on a hedged, or dollar-neutral basis, they were up by 1 to 3 points, sources said.

Despite the fact that the coupon on the new Radian convertibles ended up being much lower than the initially talked 3.5% to 4%, the deal was priced off of shares in a concurrent stock offering at a discounted $8.00 per share, which helped boost the convertibles' value.

In addition, the underlying shares have run up significantly in recent months, lending particular appeal for hedged players looking to take advantage of "a lot of air under the stock," a New York-based sellsider said.

Radian was definitely the name of the day, with one trader saying that for a good part of the day it seemed like it was "all Radian." By day's end, Radian accounted for about 30% of the day's trading volume, according to Trace data.

Elsewhere, Starwood Property Trust Inc.'s 4.55% convertibles, which priced Feb. 11, gained nearly 3 points outright to better than 106 after the Greenwich, Conn.-based mortgage loan investor beat profit and revenue estimates and guided higher for the full year compared to consensus estimates.

Another recent new issue, Cobalt International Energy Inc. gained about 3 points outright and was higher by roughly 0.25 point on a dollar-neutral basis, with the stock up 8%, after the Houston-based oil and natural gas deepwater driller posted a wider fourth-quarter loss on higher operating and interest costs.

Stocks were the main feature of the day, surging another 1% after testimony before lawmakers from Federal Reserve chairman Ben Bernanke, in which he reiterated his commitment to current Fed stimulus policy.

Also on Wednesday pending home sales came in better than expected in January.

"A lot of names were better on hedge," a New York-based trader said.

Given the risk-on trade in play, gold was a weak spot in equities, and a couple of convertible gold names were in trade including Kinross Gold Corp. But those convertibles were trading flat right around par with the underlying shares slipping 4 cents, or 0.5%, to $7.89.

New Radian jumps on debut

Radian's newly priced 2.25% convertibles opened up higher at 103 bid versus an underlying share price of $8.37 early Wednesday and were seen at the end of the day at 105.25 bid, 105.75 offered versus a share price of $8.45, sources said.

Radian's older 3% convertibles due 2017 were at 107.25 bid near the end of the session, which is about 7 points higher on an outright basis for the week and better on a hedged basis by 3 points over a two-day period.

Radian shares, which have had a run higher for the last three months and have added about 30% in the last two weeks, gained another 8 cents, or nearly 1%, to $8.51 by midafternoon in heavy volume. But those shares pared gains into the close, ending higher by only 2 cents at $8.44.

On Dec. 31, Radian shares closed at $6.11.

The Radian convertibles were seen higher by about 3.5 points on a dollar-neutral, or hedged, basis, using a delta of about 80%, according to one New York-based trader.

A second source saw a hedged expansion of only 1 point, while a third source quoted 1.5 points to 2 points expansion during the session.

"The new shares were offered at a discount to the close, and then there was richening of 2 points in addition from the opening bid," the trader said.

Given the discounted stock price, the effective terms were 2.25% with an initial conversion premium of 27%, which wasn't as Draconian as pricing through the rich end of terms sounded, the trader said, because the stock opened up.

The underlying stock run up in recent months also helped the new convertible deal.

Hedged players saw it as a good opportunity to get heavy on their deltas, or short the underlying shares, a second trader said.

Given the rally in stocks overall, hedged players were getting heavier on a lot of stocks and at the same time the convertibles were tightening on a credit basis, the trader said.

Radian priced an upsized $350 million of six-year convertible senior notes at par late Tuesday to yield 2.25% and with an initial conversion premium of 32.5%. Later the greenshoe was exercised, lifting the deal size to $400 million, which was double the initially talked $200 million base size for the registered, off-the-shelf deal.

Pricing came at the rich end of revised talk, which was tightened during marketing to 2.25% to 2.75% with a 27.5% to 32.5% initial conversion premium, from a 3% to 3.5% yield and 25% to 30% premium.

Concurrently with the notes, Radian priced 34 million shares plus a 5.1 million greenshoe at $8.00 each. The stock deal was upsized from an initially talked 30 million shares.

Morgan Stanley & Co. LLC and Goldman Sachs & Co. were the joint bookrunners of both offerings. Keefe, Bruyette & Woods Inc. was the co-manager of the notes offering.

The notes are non-callable until March 8, 2016 and then are provisionally callable if shares exceed 130% of the conversion price.

The company plans to use the proceeds from both offerings to fund working capital requirements and for general corporate purposes, including additional capital support for their mortgage insurance business.

Radian is a Philadelphia-based mortgage insurer.

Cobalt expands on hedge

Cobalt's 2.625% convertibles, of which $1.2 billion priced Dec. 12, traded higher by 2.5 points to 3 points outright to 103, which represented a 0.25-point expansion on a dollar-neutral, or hedged, basis versus the $24.96 share price.

Shares rose $1.87, or 8.1%.

The share rise came despite a loss of $66.5 million, or 16 cents per share, that the Houston-based energy company posted, compared with a loss of $51.1 million, or 13 cents per share, in the same quarter last year. The company, which is still in the exploration phase, didn't report any revenue for either period.

Analysts, on average, expected a loss of 11 cents per share.

Total operating costs and expenses increased 23% to $64.4 million, and the company incurred $3.2 million in interest expense compared with no interest expense in the year-ago period, the company said.

For the full-year 2012, Cobalt posted a loss of $283 million, or 70 cents per share, compared with a loss of $133.6 million, or 35 cents per share, in 2011. The company didn't report any revenue.

Nevertheless, in its report, the company also provided an update on the results of its Shenandoah appraisal well that was encouraging.

"It is particularly gratifying to share the encouraging results of the Shenandoah appraisal well so soon after announcing our North Platte Inboard Lower Tertiary discovery," the company's chief exploration officer, James W. Farnsworth, said in the release.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Kinross Gold Corp. NYSE: KGC

Radian Group Inc. NYSE: RDN

Starwood Property Trust Inc. Nasdaq: STWD

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