TAL Education adds outright, improves on hedge; Banc of California quiet; Chesapeake eyed

By Rebecca Melvin

New York, May 16 - TAL Education Group's newly priced 2.5% convertibles traded higher on an outright basis on Friday and improved over the course of the session on a dollar-neutral, or hedged, basis after the Beijing-based after-school tutoring services company priced $200 million of the five-year notes at the midpoint of talk.

The new TAL 2.5% convertibles ended the session at 104.5 bid, 105.5 offered with the underlying shares at $21.53. That represented an expansion from the issue price, even though early in the session the bonds were unchanged dollar neutral at 103 bid, 104 offered versus an underlying share price of $21.80.

Banc of California Inc.'s new 8% tangible equity units were mostly quiet after the Irvine, Calif.-based retail bank priced the $60 million of units at the rich end of coupon talk.

Elsewhere, convertibles were trading quietly, a New York-based trader said.

He said that news on Chesapeake Energy Corp. didn't move Chesapeake Energy's convertibles, although shares dropped off nearly 5%.

The Oklahoma City-based oil and natural gas company is spinning off its oil-field service operations to shareholders and selling other assets for a total divestiture of about $4 billion in an effort to reduce debt and strengthen its balance sheet.

Chesapeake's myriad convertibles were little changed on Friday, but they could potentially be something to watch going forward as some technicals and incremental value may be introduced with the divestitures, a New York-based convertibles analyst said.

The only other name heard in trade was Allegheny Technologies Inc.'s 4.25% convertibles due 2014, which mature in two weeks. They traded last at 100.3, which was little changed, and they stand right about where they should be, a New York-based trader said.

In the broader markets, equities managed to reverse early losses but were still down for the week after starting the week at record highs. Volume was light, however.

The Dow Jones industrial average managed to eke out a gain of 44.50 points, or 0.3%, to 16,491.31, the S&P 500 stock index edged up 7.01 points, or 0.4% to 1,877.86 and the Nasdaq stock market added 21.30 points, or 0.5%, to 4,090.59.

But for the week, stocks pulled back sharply.

The change in stocks from highs notched early in the week to weakness late in the week didn't foster a similar trend in convertibles. On a hedged basis, valuations were stable this past week, a New York-based trader said.

"I haven't seen a change in valuation over the past week," he said. "The stock market is down, but the bond market is up, so it's kind of offsetting. High yield is kind of hanging in pretty well," he said.

New TAL expands on swap

TAL Education's new 2.5% convertibles due 2019 closed up at 104.5 bid, 105.5 offered at the end of the session with shares up $1.31, or 6.5%, to $21.53.

That represented a gain of about 2 points from issue on swap given a delta of about 60% to 65%, a syndicate source said.

The new TAL bonds had started out the day higher outright, but flat on a dollar-neutral, or hedged, basis at 103 bid, 104 offered with the underlying shares at $21.80. The bonds priced at par, but "they didn't really expand," a Connecticut-based trader said of the bonds early on. At that point, TAL Education shares gained $1.31, or 6.5%, to $21.53.

TAL shares plunged $4.94, or 19.6%, to $20.22 on Thursday after the convertible deal was launched.

The company priced $200 million of five-year convertible notes at par after the market close Thursday to yield 2.5% with an initial conversion premium of 30%.

The issue was sold both under Rule 144A in the United States and under Regulation S. Pricing came at the midpoint of talk, which was for a 2.25% to 2.75% coupon and a 27.5% to 32.5% premium.

Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC were joint bookrunners of the notes, which have an over-allotment option for up to an additional $30 million of notes.

TAL cannot call the bonds, but holders can put the notes on May 15, 2017. There is a takeover put at 100% of principal plus interest.

The company also entered into capped call transactions with one or more initial purchasers of the bonds. The cap price of the capped call will initially be $35.39 per ADS, which boosts the premium from the issuer's perspective to about 75%.

About 10% of proceeds will be used to pay the net cost of the capped call; remaining proceeds will be for strategic investments and general corporate purposes.

New Banc of California quiet

Banc of California's new 8% tangible equity units, which mature May 15, 2017, were not heard in trade after they priced with a $50 par late Thursday. Banc of California shares ended the session up 20 cents, or 2%, to $9.98 in much heavier-than-average volume.

The Irvine, Calif.-based provider of retail banking products and services priced an upsized $60 million of 8% tangible equity units at $50 per unit par, and with a threshold appreciation premium of 15% over the reference price, according to a pricing term sheet.

The registered deal was initially talked at $50 million in size. Pricing came at the rich end of 8% to 8.5% coupon talk and at the midpoint of 12.5% to 17.5% premium talk.

The bank also priced about $50 million of common shares, or 5,125,000 shares at $9.78 each.

BofA Merrill Lynch acted as bookrunning manager for the units, which have a 30-day option for the purchase of up to an additional $9 million of units, which was upsized from $7.5 million.

Proceeds will be used to complete a previously announced acquisition of 20 California branches from Popular Community Bank and for general corporate purposes.

Chesapeake in focus

Chesapeake's 5.75% convertible preferreds traded at 1,120 versus the company's $7.64 closing common share price, and a second Chesapeake 5.75% convertible closed at 1,190 versus the close, which was little changed on the day, a New York-based convertibles analyst said.

Chesapeake's common shares fell $1.35, or 4.7%, to $7.64.

There was not much pricing action in the convertibles despite lower shares.

"They are pretty much moving down on a delta, and there are only a couple of trades on the tape so it's not really eventful," the trader said.

But going forward with its spin-off and other asset sales underway from now to the end of June there may be some interesting trades given ratio adjustments that might be made.

"Depending on how they are doing the spin-off, the bonds will get a ratio adjustment, sort of like a dividend to common shareholders. It's a similar situation to any dividend or distribution to shareholders," the analyst said.

Therefore it potentially introduces technicals and risk that may be accompanied by some incremental value, he said.

"In order for guys to hedge, it introduces risk for convert holders on the borrow side and averaging periods too," he said.

He suggested that it's not going to be a huge loss or gain, and that it will depend on the mechanics of the deal, but it is something to watch.

Mentioned in this article:

Banc of California Inc. Nasdaq: BANC

Chesapeake Energy Corp. NYSE: CHK

TAL Education Group NYSE: ADS: XRS

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