New Walter gains well on debut; Lam Research flat to 'in' slightly on hedge; MannKind down

By Rebecca Melvin

New York, Oct. 18 - Walter Investment Management Corp.'s newly priced 4.5% convertibles jumped on their debut in the secondary market on Thursday - and even the underlying shares were higher early on - after the Tampa, Fla.-based mortgage services company priced an upsized secondary offering of stock and $265 million of the convertible notes, which came at the cheap end of talk, market sources said.

The new Walter convertible was heard at 104.25 bid, 104.75 offered versus a share price of $43.20 in afternoon trading. At the close, it was called up 3 to 3.5 points on an outright and dollar-neutral, or hedged, basis as the shares dropped into the close.

Among comparable mortgage-related issues, there wasn't much trading action in either of PHH Corp.'s 6% or 4% convertibles, and shares of the Mt. Laurel, N.J.-based mortgage, lending and fleet services company fell 1.7%. But Fidelity National Financial Inc., which provides title insurance mortgage services and other services, saw its 4.25% convertibles due 2018 trade up 0.6 point to 125.5, according to trace data.

Many investment-grade names were in trade during the session, including Lam Research Corp.'s trio of convertible bonds, which were called flat to "in" slightly on a hedged basis as the underlying shares gained.

The Fremont, Calif.-based semiconductor-equipment maker reported fiscal first-quarter earnings that handily beat estimates, with the company citing strong operational execution and solid progress toward synergy targets related to its acquisition of Novellus.

MannKind Corp.'s convertibles were lower along with a 24% drop in the underlying shares after the Valencia, Calif.-based biopharmaceutical company announced plans to sell up to 140 million shares of stock. MannKind will use the funds to pay for new trials of its inhaled diabetes drug Afrezza and cancel more than $200 million in debt owed to its chief executive.

"There was lots of IG: Intels, Amgens were better today. Lam Research bonds came in, or were flattish to in small," a New York-based trader said.

New Walter gains on debut

Walter's newly priced 4.5% convertibles jumped up to 104.25 bid, 104.75 offered versus an underlying share price of $43.20 in early afternoon trading.

"It seems like they gapped up at the open and stayed there," a trader said. The slide in the underlying shares into the market close, however, took the new paper down to about 103 to 103.5.

Shares of the company moved higher in early trading, reaching as high as $43.49, but then dropped to close down 14 cents, or 0.3%, at $42.51.

One trader said he was moving the new notes on a 75% delta.

"People are excited about the opportunity that [Walter] is building a war chest to buy mortgage assets that are out there," a West Coast-based trader said. Walter was expected to bid on mortgage lender Residential Capital's bankruptcy auction next week.

He noted that it wasn't typical for a company to bring a bond and see the stock gap up as it did in early trading. But the business is seen as attractive as the housing market has slowly started to recover, he said. There is a lot of paper in convertibles that is related to the housing recovery, including homebuilders. "You can lump it all into housing-mortgage related," he said.

The paper breaks-even in less than the seven-year maturity, or in 6.36 years, according to the trader's model, using 28.57 points of premium over parity, which is good for outright investors.

Pricing of the registered, off-the-shelf deal came at the cheap end of talk, which was for a 4.5% to 5% yield and 35% to 40% initial conversion premium.

Using the midpoint of talk, with a credit spread of 1,100 basis points over Libor, and 35% vol., got the paper 0.86 point cheap.

Walter priced $265 million of the seven-year convertible senior subordinated notes along with an upsized secondary stock offering of 6 million shares at $42.00 per share, for proceeds of $252 million. There is also an over-allotment option of up to an additional 900,000 shares.

Initially, the stock offering was talked at 4.5 million shares, with a greenshoe of up to an additional 675,000 shares.

The convertible bond issue has a $25 million greenshoe.

Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Bank of America Merrill Lynch and Barclays were the joint bookrunners for the note offering. RBS Securities Inc. was a co-manager.

The convertibles are non-callable for life with no puts. They are not convertible prior to May 1, 2019 except for certain circumstances, and they will settle in cash, stock or a combination at the issuer's option.

Proceeds from the convertible notes will be used to repay the company's second-lien senior secured term loan and fees, expenses and premiums associated with it.

About $95 million of the proceeds from the common stock offering will be used to fund partially an acquisition of the outstanding capital stock of Reverse Mortgage Solutions Inc. Remaining proceeds will be used to enhance liquidity and growth and be used for working capital and general corporate purposes.

MannKind trades down

MannKind's 5.75% convertibles due 2015 traded down more than 6 points to 55.75 bid, 56 offered, according to a trader.

The MannKind 3.75% convertibles due December 2013 weren't heard in trade.

Another trader was involved in trading the MannKind warrants on Thursday.

Shares of the Fremont, Calif.-based biopharmaceutical company slumped 63 cents, or 24%, to $1.97 in heavy volume.

The sharp move lower was attributed to the "double edged sword" of news that included the company announcing plans to sell up to 140 million shares of stock and cancel more than $200 million in debt owed to chief executive Alfred Mann.

"It was wild; they are doing new equity, new capital and they were paying down debt; but it's a real double-edged sword in that it's debt from Alfred Mann, and it doesn't look like there is any outside money coming into this story," the trader said.

MannKind said in September that it would sell up to $500 million in common and preferred stock, warrants, and debt securities as it seeks approval from the Food and Drug Administration for its Afrezza drug.

One offering consists of 40 million shares of restricted stock and warrants to buy 30 million more restricted shares to a group controlled by MannKind's CEO and biggest shareholder. In return, the Mann Group LLC will cancel $224.6 million in debt that MannKind owes it.

The public offering of 40 million shares and 30 million warrants to buy another 0.75 share is priced at $2 each. The exercise price of the warrants is $2.60 per share. The banks managing the stock sale may buy another 6 million shares and 4.5 million warrants.

Jefferies & Co. Inc. and Piper Jaffray & Co. are acting as joint bookrunners for the offering. JMP Securities LLC, Griffin Securities, Inc. and Imperial Capital LLC are acting as co-managers.

Mentioned in this article:

Fidelity National Finance Inc. NYSE: FNF

Lam Research Corp. Nasdaq: LRCX

MannKind Corp. Nasdaq: MNKD

PHH Corp. NYSE: PHH

Walter Investment Management Corp. NYSE: WAC

© 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.