New Dominions trade around reoffered price and lower; planned Array note valuations eyed

By Rebecca Melvin

New York, June 4 - Dominion Resources Inc.'s newly priced 6.125% and 6% convertible equity units were trading around their reoffer price and a little lower on their debut in secondary market trading on Tuesday as the underlying shares of the Richmond, Va.-based energy company toggled the flat line for much of the session.

The two new Dominion tranches totaling $1 billion traded similarly and ended the day around $48.75 compared to their $49.00 reoffered price.

Also in the primary market, Array BioPharma Inc.'s planned $100 million of seven-year convertible senior notes were getting the once over. One trader valued the new paper somewhat rich and another one saw it a little cheap based on differing valuation inputs.

Meanwhile Titan Machinery Inc.'s convertibles, which had been trading better on Monday on the strength on an outright buyer, were a little weaker on Tuesday. Shares of the West Fargo, N.D.-based farm equipment retailer slipped 1.7%.

Molycorp Inc. was also getting hit lower, with the Molycorp 3.25% convertibles trading down about a point to 69.5 on Tuesday, with the underlying share down 3%.

Peabody Energy Corp. was another name "getting offered lower and lower and lower," a New York-based trader said. Peabody's 4.75% convertibles were down to 83.5 on Tuesday, a slide from 87 last week.

Ryland Group Inc. was another name under pressure, he said.

Stock markets were off about 0.5% to 0.6% on Tuesday although they ended the session off their lows. The Dow Jones industrial average ended down 76.49 points, or 0.5%, at 15,177.54; the S&P 500 stock index closed down 9 points, or 0.6%, at 1,631.38 and the Nasdaq stock market fell 20.11 points, or 0.6%, to 3,445.26.

New Dominion flat to weaker

Dominion's two equity unit tranches traded similarly despite differing maturities and coupons. But the variations were minimal with the maturities only three months different and the coupons close.

"The valuation difference is minimal," a New York-based trader said.

The Dominion 6.125% units and the Dominion 6% units were both seen trading between 48.70 and 49.10 for most of the day.

A second source said he saw them lower at 48.50 to 48.75.

A third market source said he saw the paper "left" at 48.75 bid at the end of the day, after trading at 48.5.

Dominion shares closed up 11 cents to $55.66 after spending much of the session at the flat line or lower.

Whether its convertible deal was under pressure from the shares or the deal itself including its large size and structure was difficult to say.

Dominion priced $1 billion of three-year mandatory convertible equity units in two tranches at a 2% discount to their $50 par in a registered, off-the-shelf deal via joint bookrunners J.P. Morgan Securities LLC, BofA Merrill Lynch, Goldman Sachs & Co., and UBS Investment Bank.

"People were looking at it, but I was not trading it," a New York-based trader said. As for the success of this deal and other recent new issues, the trader said, "People like to see it go up to 102 bid at least." Dominion and a couple of last week's new deals didn't make that type of a move.

Twenty million of the equity units priced at the cheap end of talk. Each series has a $50 million over-allotment option.

The 10 million of series A units have a 6.125% distribution rate and a 17.5% initial conversion premium, compared to the talked distribution rate of 5.625% to 6.125% and 17.5% to 22.5% premium. They mature in April 2016.

The 10 million of series B units have a 6% distribution rate and 17.55% premium, which compared to a talked distribution rate of 5.5% to 6% and premium of 17.5% to 22.5%. They mature July 1, 2016.

Both series of units will be non-callable for life with no puts and have takeover and dividend protection.

Proceeds will be used for general corporate purposes and to fund its growth plan, including the Cove Point liquefaction project.

The planned Dominion deal was seen in the gray market at 48.5 bid, 49.5 offered ahead of final terms seen being fixed.

Planned Array valuations eyed

Array's planned sale of $100 million of seven-year convertible senior notes were valued anywhere from 1.3% rich to more than 2% cheap depending on credit spread and volatility inputs.

Using a credit spread of 1,000 basis points over Libor and a 45% vol., one trader got the deal 1.3% rich at the midpoint of talked terms.

A second source using a credit spread of 800 bps over Libor and a 40% vol. got the deal more than 2% cheap at the midpoint of talk.

The underwriter was said to be using 850 bps spread and 38% vol. One source said 38% vol. seemed low.

The deal was talked at a 3% to 3.5% coupon and a 27.5% to 32.5% initial conversion premium.

"Given the way other things are coming in I think this needs to be cheaper," a Connecticut-based trader said, referring to other new deals in the convertibles market including Tuesday's Dominion deal.

Array is a registered, off-the-shelf offering with a $15 million greenshoe being sold via joint bookrunning managers Goldman Sachs and JPMorgan.

The notes are non-callable until June 4, 2017 and then are provisionally callable if the stock price exceeds 130% of the conversion price, with a make-whole premium based on its fundamental change make-whole table. There are no puts.

Along with takeover protection, there is dividend protection in the form of a conversion rate adjustment.

About $96.6 million of net proceeds will be used to repay its outstanding secured debt, with remaining proceeds for general corporate purposes.

Boulder, Colo.-based Array is a biopharmaceutical company focused on targeted small molecule drugs to treat cancer.

Titan loses vigor

Titan Machinery's 3.25% convertibles due 2019 traded at about 98 on Tuesday from 98.5 on Monday.

The paper was said to be left "better for sale," following trades at 98, which means it was easier to buy the paper.

Titan shares slipped 36 cents, or 1.7%, to $20.58 in light volume.

There didn't appear to be any fundamental news on the farm equipment retailer driving trade.

Typically a fairly illiquid issue, the Titan convertibles had been strengthening into Tuesday. They have been 97.25 in the Street recently.

Mentioned in this article:

Array BioPharma Inc. Nasdaq: ARRY

Dominion Resources Inc. NYSE: D

Molycorp Inc. NYSE: MCP

Peabody Energy Corp. NYSE: BTU

Ryland Group Inc. NYSE: RYL

Titan Machinery Inc. Nasdaq: TITN

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