TAL Education adds after earnings beat; Echo Logistics, A. Schulman deals look cheap

By Rebecca Melvin

New York, April 28 – U.S. convertibles trading action saw something of a pickup on Tuesday but was still subdued considering the number of earnings reports that hit the news tape.

One trader said that none of the names he follows had traded differently on the back of earnings.

Earnings reports from convertibles issuers are still ramping up, so more active trading is anticipated later this week and next week, a New York-based sellsider said.

TAL Education Group’s convertibles traded higher on both an outright and dollar-neutral basis after the Beijing-based after-school tutoring services company reported earnings that beat estimates on Tuesday, the trader said.

The TAL Education 2.5% convertibles due 2019 were quoted at 147 versus an underlying share price of $38.25 at the close. Shares rose 6%.

Market players were watching Twitter Inc. shares, which plunged late in the session after the San Francisco-based social media company’s quarterly results were reported unexpectedly ahead of the closing bell instead of after it. Disappointment over revenue sent shares sharply lower.

Twitter pared losses slightly to end 20% lower after its first-quarter revenue missed estimates and it lowered its revenue outlook.

First-quarter revenue rose 74% to $436 million but missed estimates for $456 million.

Revenue for the second quarter is now expected to be $470 million to $485 million, which is below the average of analysts’ forecasts for $538 million.

Twitter’s first-quarter net loss widened to $162 million from a loss of $132.4 million in the year-earlier period. Excluding some items, profit was 7 cents per share, which beat analysts’ estimates for 4 cents a share profit.

The company cut full-year guidance to $2.17 billion to $2.27 billion from its previous range of $2.3 billion to $2.35 billion.

Twitter’s results were first reported by Selerity Inc., a New York-based provider of financial news and information.

Tesla Motors Inc. convertibles were a little higher again after improving on a dollar-neutral basis on Monday. Shares of the Palo Alto, Calif.-based electric car maker fluctuated Tuesday and ended down 0.5%, The Tesla 1.25% convertibles, or the B, tranche were quoted at 93.25 bid, 93.375 offered at the close, which was flattish on an outright basis but better on swap.

“The whole Tesla complex was a little higher,” a sellsider said.

In the primary market, market players were looking at two deals in the market, although no gray market was reported in the paper ahead of final terms being fixed.

New deals look cheap

Echo Global Logistics Inc. was looking “pretty cheap, and should do well,” a Connecticut-based trader said, citing a valuation that put the deal worth 103.25 at the midpoint of talk, using a credit spread of 600 basis points over Libor and a 30% vol.

The $150 million Echo deal was launched Monday for pricing Wednesday and was talked at a 2.75% to 3.25% coupon and 27.5% to 32.5% premium.

Also A. Schulman Inc. launched a $110 million offering of cumulative perpetual convertible special stock late Monday with pricing seen after the market close Tuesday.

The “special stock” structure is something new to the market. The convertible is expected to be considered more equity-like than a convertible bond or a convertible preferred, and therefore is geared toward getting more equity “credit” from the ratings agencies, informed sources said.

Even though the special stock seems to be more equity-like than a preferred stock, the issue has a cumulative dividend, a former portfolio manager said. He noted that the par value of the special stock is $1,000, higher than the typical convertible preferred of $50 or $100.

The former portfolio manager said that it would be good news for the convertibles market if investment bankers have created a new structure that will encourage more companies to issue convertibles.

The A. Schulman issue was expected to price after the market close on Tuesday, and its talked terms looked positive from the perspective of both outright and hedged investors, the source said.

A second convertibles source also said the deal looked cheap from an investor’s perspective.

Shares of the Ohio-based plastic compounds and resins supplier fell $3.14, or 7%, to $41.86 on the heels of the convertibles launch.

The paper was talked at a 6.5% to 7% dividend and a 20% to 25% premium.

J.P. Morgan Securities LLC and BofA Merrill Lynch are the bookrunners for the A. Schulman sale, which is a registered deal.

Co-managers for the transaction are Commerz Markets LLC, BBVA Securities Inc., Citigroup Global Markets Inc. and RBS Securities Inc.

There is a greenshoe for a further $15 million.

Mentioned in this article:

A. Schulman Inc. Nasdaq: SHLM

Echo Global Logistics Inc. Nasdaq: ECHO

TAL Education Group NYSE: XRS

Tesla Motors Inc. Nasdaq: TSLA

Twitter Inc. Nasdaq: TWTR

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