Planned Shutterfly looks about fair; Ryland slightly cheap; Electronic Arts, Take-Two gain

By Rebecca Melvin

New York, May 14 - Investors were sizing up two new deals in the convertibles market on Tuesday.

Shutterfly Inc.'s $220 million of five-year convertible bonds, which represent the first debt taken on by the Redwood City, Calif.-based provider of digital photo services, were looking about fair value.

Meanwhile, Ryland Group Inc.'s $250 million of six-year convertibles, launched ahead of the market open, were seen about 1% cheap, market players said.

The Ryland deal was "wrapped around plus one," or at 101, in the gray market shortly before the market close and ahead of final terms being fixed, a New York-based trader said.

The two bond issues were practically carbon copies in terms of structure, with low, below one-percentage-point yields and high premiums. The Shutterfly paper is a five-year bullet, and the Ryland convertible is a six-year bond that is non-callable for four years.

Ryland's existing 1.625% convertibles due 2018 were seen little changed at about 160. The in-the-money issue wasn't expected to be affected by the new paper, a New York-based trader said.

Elsewhere, trading in the convertible bond market was pretty light, traders said.

Electronic Arts Inc., which was a notable gainer last week, was up again on an outright basis Tuesday. The convertibles of the Redwood City, Calif.-based video game publisher have steamed upward since better-than-expected guidance for full-year results came out last week.

Sector sister Take-Two Interactive Software Inc. also traded higher Tuesday, with the older of two existing Take-Two convertibles changing hands at about 165 during the session, which was up about 5 points on the day, according to Trace data.

DryShips Inc.'s 5% convertibles were up about a point at 88.25 with the underlying shares higher by 0.5%, according to a New York-based trader. Ebullience about the prospects for the global economy on Tuesday helped cheer the shipping company's investors.

Stocks rallied again, with indices rising to fresh all-time highs. The S&P 500 stock index gained 16.57 points, or 1%, to 1,650.334; the Dow Jones industrial average jumped 123.57 points, or 0.8%, to 15,215.25; and the Nasdaq stock index gained 23.82 points, or 0.7%, to 3,462.61.

"They'll go up forever on the absolute belief in Bernanke. The current economy doesn't justify the highest market of all time," a New York-based trader said.

The Federal Reserve's easy monetary policy under Fed chairman Ben Bernanke is aimed at stimulating the economy with low interest rates, and its bond-purchasing program is viewed as a backstop for investors, the trader said.

Planned Shutterfly quiet in gray

Shutterfly's planned $220 million of five-year convertibles was seen at fair value at the midpoint of talk using a credit spread of 400 basis points over Libor and 35% volatility, a Connecticut-based trader said.

The deal is talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 27.5% to 32.5%.

One trader said he thought the deal looked rich. "Shutterfly is reminiscent of the worst excesses of the convert market, and just when everyone is complacent and believing anything can price and go up is usually when the exact opposite happens."

The trader was referring to the paper's low coupon below 1% and the high premium, which he suggested would probably see a strong debut, but holders of the paper for any amount of time would be at risk of the bond collapsing on any type of hiccup in the shares going forward.

"The terms aren't going to hold up. What it does the first day is meaningless. Someone is going to have to hold those bonds, and it doesn't take much to make it look horrible," the trader said. "There's no protection. It offers no support if the stock goes down."

He said that the scarcity factor was again to blame for the problem. "There is no merchandise," he said, referring to the fact that there is very little new issuance and many issues are coming due.

The bonds are being priced concurrently with convertible note hedge and warrant transactions, or a call spread, which makes it more attractive for convertible arbitrage or hedged players to be involved in the new deal.

Shutterfly shares surged $3.55, or 8%, to $47.53 on Tuesday.

Morgan Stanley & Co. LLC is the left lead bookrunner with J.P. Morgan Securities LLC on the right as well as BofA Merrill Lynch and Citigroup Global Markets Inc. Co-managers are Credit Suisse Securities (USA) LLC, Wells Fargo Securities LLC and Evercore Partners LLC.

The notes are non-callable with no puts. There is takeover protection, and there is net share settlement together with contingent conversion at the standard 130% price trigger.

Proceeds are intended to be used to fund acquisitions and other strategic transactions. The company also intends to use a portion of the proceeds to pay the cost of convertible note hedge and warrant transactions and to repurchase up to $30 million of common stock. Any remaining proceeds will be used for general corporate purposes.

The Rule 144A deal has an over-allotment option for $30 million.

Planned Ryland at 101 in gray

Ryland's planned $250 million of six-year convertibles that launched ahead of the market open on Wednesday were seen about 1% cheap at the midpoint of talk using a credit spread of 200 bps over Libor and a 40% vol., a Connecticut-based trader said.

The trader said five-year credit default swaps on Ryland were 200 bps.

The deal was talked to yield 0.25% to 0.75% with an initial conversion premium of 45% to 50%.

"I don't really like either of them but they will probably trade to 105," the trader said, referring to both Shutterfly and Ryland.

The registered, off-the-shelf deal has an over-allotment option for $37.5 million of notes. It was sold via Citigroup, JPMorgan, Wells Fargo Securities and RBS Securities Inc. as joint bookrunning managers, with Deutsche Bank Securities Inc. and UBS Securities LLC acting as co-managers.

The notes are non-callable for four years, with no puts.

The company plans to use the proceeds for general corporate purposes, which may include acquisitions to expand market opportunities.

Westlake Village, Calif.-based Ryland is a homebuilder and mortgage finance company.

Ryland shares added 45 cents, or nearly 1%, to $50.01 on Tuesday.

Existing Ryland flat

Ryland's existing 1.625% convertibles due 2018, which priced initially in 2012, were little changed at about 160.

"It's not going to be affected," a New York-based trader said of the older convertible in light of the new deal.

"They are already 1.625% at 160, and the common yield is under 1%. You're getting a couple of extra years, but less yield and a higher price," he said.

The old paper is due in 2018 and non-callable. The new paper is callable in four years in 2017.

Mentioned in this article

DryShips Inc. Nasdaq: DRYS

Electronic Arts Inc. NYSE: EA

Ryland Group Inc. NYSE: RYL

Shutterfly Inc. Nasdaq: SFLY

Take-Two Interactive Software Inc. Nasdaq: TTWO

© 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.