DFC Global prices $200 million; Prospect Capital launches; selling hits volatility names

By Rebecca Melvin

New York, April 10 - DFC Global Corp.'s planned $200 million of five-year convertibles looked cheap but in line with typical pricing of late ahead of final terms seen being fixed after the market close on Tuesday, according to market sources.

There was only a par bid in the gray market ahead of final pricing, a sellsider said of the new DFC deal, which was coming with a concurrent call spread and seen appealing to hedged players.

Late in the day, DFC sold $200 million of the five-year convertibles to yield 3.25% with an initial conversion premium of 29%, according to a news release.

The Berwyn, Pa.-based provider of financial services to unbanked and under-banked consumers has two existing convertible bonds, including $45 million outstanding of 2.875% convertibles, which are putable in December, and were not heard in trade, and a 3% convertible due 2015 that was seen trending down in line on a dollar-neutral, or hedged, basis to around 114 versus an underlying share price of $17.59.

Other companies with convertible bonds in the same space, including Cash America International Inc. and World Acceptance Corp., weren't trading in any significant way.

Also in a related area, CompuCredit Holdings Corp.'s 5.875% convertibles due 2035 were seen up 0.7 point at 43.25, according to Trace data. CompuCredit's 3.625% convertibles due 2025, which are putable in May, were at 99.687, according to Trace.

Elsewhere, volatility names were for sale, sources said, but the drops were mostly in line with underlying shares, which meant that valuations were doing OK.

"It was pretty much across the board," a New York-based trader said, regarding vol. names, or most convertible paper with pricing between par and 120.

"There's been a vol. sale for the last two months and now people are looking at it again," he said.

Medivation Inc., which priced its deal successfully in mid-March, saw the newish 2.625% bonds in trade and lower by 2 points at 106.

Meanwhile, Alcoa Inc.'s in-the-money 5.25% convertibles due 2014 slipped during the session, trading last at 157.4, which was down about 4 points on the day. During the session, the Alcoa convertibles traded at 159.

After the market close, the Pittsburgh-based aluminum maker reported strong first-quarter results that beat both top and bottom line estimates, and the underlying shares popped in after-hours trade.

Despite the good news, there were expectations of further selling in convertibles on Wednesday. One source said during Tuesday's session that there were dealers working on a few larger blocks of convertibles for sale, but that "the prints" hadn't materialized yet.

A second source said after the market close, a big SanDisk Corp. trade occurred, and the pricing was a bit lower than the previous level, but nothing to write home about.

The "risk off" trade was strong in the broader markets Tuesday, with equities dropping for a fifth straight day. The S&P 500 stock index notched its worst day since Dec. 8, sliding 23.61 points, or 1.7%, to 1,358.59.

Resurrected European debt worries and tepid to weak economic data in the United States were cited for the accelerated selling.

Wholesale inventories rose more than expected in February by 0.9% to a record $478.9 billion, according to the Commerce Department, after an upwardly revised 0.6% rise in January. Economists forecast a gain of 0.5% versus a 0.4% increase in January.

Small business confidence slipped for the first time in six months, with the National Federation of Independent Business saying its optimism index dropped to 92.5 in March from 94.3 the prior month.

DFC looks cheap

Ahead of pricing, the new DFC Global deal looked pretty attractive on its talked terms, sources said. One sellsider said the credit spread was anywhere from 700 basis points to 750 bps over Libor and that "anything below 850 bps makes them cheap."

An East Coast-based buysider said, "...from a technical perspective the current pricing is good. But it needs to be: this is hedge fund trade, not really a fundamental one."

The buysider said that DFC had managed its credit exposure relatively well compared to its peers, but nevertheless, "the business is a bit dicey....I am not sure I want to take on that risk right now."

The new bonds were talked to yield 2.75% to 3.25% with an initial conversion premium of 27.5% to 32.5%.

The company's existing 3% convertibles were seen trading at 114 versus an underlying share price of $17.59, which compared to 115.75 versus an underlying share price of $17.95 on Monday.

DFC shares Tuesday dropped $1.06, or 6%, to $16.53, which was a harder fall than that of its competitors.

The deal was being distributed under Rule 144A via Barclays Capital Inc., Deutsche Bank Securities Inc. and Wells Fargo Securities LLC as joint bookrunners, and with Nomura Securities and JMP Securities LLC as joint lead managers and C.L. King & Associates, FBR Capital Markets, Roth Capital Partners and William Blair & Co. as co-managers.

The bonds are non-callable for life with no puts. The securities have net share settlement and have dividend protection via a conversion rate adjustment, as well as cash takeover protection.

Proceeds will be used to repay amounts outstanding under the company's revolving credit facility and for general corporate purposes, and to fund the cost of a call spread.

Alcoa slips ahead of earnings

Alcoa's 5.25% convertibles due 2014 traded last at 157.4, which was down about 4 points on the day. During the session, the bonds traded at 159.

Alcoa shares fell by 28 cents, or 2.9%, to $9.32 during the session. But shares jumped 53 cents, or 5.7% in after-hours trade after the company reported earnings.

Alcoa reported first-quarter earnings per share of 10 cents per share, which was sharply higher than estimates for a 4-cent loss.

Revenue rose 9% to $6 billion even though realized aluminum prices declined.

"Performance rebounded strongly this quarter due to our proactive cash sustainability actions, our relentless focus on profitable growth, and stabilizing markets," Alcoa chief executive Klaus Kleinfeld stated in a release.

The company said it would decrease smelting capacity by 12% when it made the announcement and close plants. But demand was strong in the first quarter, with the company notching record results in global rolled products and engineered products and solutions.

Alcoa raised its 2012 global growth forecast for the aerospace market to 3% and reaffirmed its global demand growth projection of 7% and a global aluminum supply deficit in 2012.

Prospect Capital eyed

New York venture capital and private equity firm Prospect Capital Corp. launched an overnight offering of $130 million of 5.5-year convertible senior notes.

The deal was seen pricing ahead of the market open on Wednesday and was talked to yield 5% to 5.375%, with an initial conversion premium of 10%.

The Rule 144A deal was being marketed by Goldman Sachs & Co. as the bookrunner.

There is a $20 million greenshoe.

The notes are non-callable with no investor puts. They have full dividend protection in the form of a conversion rate adjustment and change-of-control protection.

The company has existing 6.25% and 5.5% convertibles.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Cash America International Inc. NYSE: CSH

CompuCredit Holdings Corp. Nasdaq: CCRT

DFC Global Corp. Nasdaq: DLLR

Medivation Inc. Nasdaq: MDVN

Prospect Capital Corp. Nasdaq: PSEC

SanDisk Corp. Nasdaq: SNDK

World Acceptance Corp. Nasdaq: WRLD

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