Arconic convertibles add outright, flat to lower dollar neutral; calendar builds

By Rebecca Melvin

New York, July 16 – Arconic Inc.’s convertibles added on an outright basis but were flat to lower on a dollar-neutral, or hedged, basis on Monday amid speculation regarding a possible buyout of the New York-based metals manufacturer, a New York-based trader said.

Cleveland-Cliffs Inc.’s bonds were a little weaker with shares lower as the iron-ore company appears to be caught up in fears related to a possible trade war, the trader said.

Elsewhere, Whiting Petroleum Corp.’s convertibles slipped slightly but didn’t appear to move much despite a 6% drop in the underlying shares amid a slide in oil prices on Monday. The stock for the Denver-based energy company fell $3.30, or 6.3%, to $49.18.

Oil was a theme in the broader markets, but convertibles put in a quiet session as trading volumes remain hushed by the summer trading lull.

A market source said it was a slow weekend for news and therefore there was not a lot of convertible market activity on a summer Monday to start the week.

Oil prices fell 4% on Monday as Libyan ports reopened and traders eyed potential supply increases from Russia and other producers who could raise output by a million barrels per day. Concerns over China’s economic growth was also a negative for prices as the Asian nation’s second-quarter GDP missed expectations.

West Texas intermediate crude for August delivery fell $2.95, or 4.1%, to $68.06 a barrel on the New York Mercantile Exchange

Calendar adds three deals

Despite the summer vacation period, the convertible primary space has been busy in recent weeks putting in its busiest month in two years in terms of new deals in June and with $2.27 billion in new paper pricing last week.

But after the market close, three new deals joined the calendar.

CalAmp Corp. plans to price $200 million of seven-year convertible senior notes in a private offering under Rule 144A to price after the market close on Tuesday. And Redfin Corp. plans to sell $125 million of five-year convertible senior notes and a concurrent common stock offering post-close on Wednesday.

Redfin, a Seattle-based residential real estate brokerage, plans to price the notes with a coupon of 1.75% to 2.25% and an initial conversion premium of 27.5% to 32.5%.

The deal is coming on the heels of Zillow Group Inc., a fellow Seattle-based real estate company, which priced a convertibles deal on June 29 that has been strong in secondary market dealings.

Goldman Sachs & Co. LLC, BofA Merrill Lynch and RBC Capital Markets LLC are joint bookrunners of the Redfin notes, for which there is a greenshoe for up to an additional $18.75 million.

Proceeds are expected to be used for working capital and other general corporate purposes, which may include technology development and marketing activities, general and administrative expenses and capital expenditures. Redfin may also use a portion of proceeds to invest in or acquire third-party businesses, products, services, technologies or other assets.

In connection with the pricing of the CalAmp notes, that company plans to enter into privately negotiated capped call transactions with certain initial purchasers of the notes.

Proceeds of the new notes will be used to pay the cost of a capped call transaction and to repurchase about $25 million of common shares and is also earmarked for working capital or general corporate purposes, which may include repurchases of CalAmp’s 2020 notes and the acquisition of complementary businesses, products, services or technologies.

Irvine, Calif.-based CalAmp develops and markets wireless communications products.

San Diego-based specialty finance company Encore Capital Group Inc. is also bringing a deal for $125 million of exchangeable notes due 2023, according to a company news release.

SunTrust Robinson Humphrey Inc. and Credit Suisse Securities (USA) LLC are acting as joint bookrunning managers of the Securities and Exchange Commission-registered deal, which will include a $22.5 million over-allotment option.

Further details regarding timing and talk were not immediately available.

In connection with pricing of the notes, Encore Capital plans to enter into privately negotiated capped call transactions with one or more underwriters of the notes.

Proceeds will be used to partially fund the acquisition of the equity interests of Janus Holdings Luxembourg Sarl not currently held by Encore and subsequently to purchase the equity interests of Cabot Holdings Sarl, which are not held by Encore.

Arconic adds outright

Arconic’s convertibles were up about a point on an outright basis but were flat to down about 0.25 point on a dollar-neutral basis amid speculation that private equity is looking at the company as a potential takeout candidate, a New York-based convertibles trader said.

It went out about a point better on an absolute basis, the trader said.

Depending on delta, the convertible bond flat to lower.

Prior to the news, the market delta was about 15% to 20%, but investors would have had to have been lighter than 10% before the news to have had any advantage on this one.

The Wall Street Journal reported on Monday that the company was drawing interest from private equity firms including Apollo Global Management. The speculation comes with Arconic shares down about 29% on the year, getting hit hard by a reduction in profit forecasts for 2018 earlier in the year due to expectations for higher aluminum prices.

Arconic shares jumped $1.82, or 10.5%, to $19.20 on Monday.

Cleveland-Cliffs eyed

Cleveland-Cliffs’ 1.5% convertibles due 2025 were trading around 117.75 to 117.875 on Monday, which was down from about 120 plus on an outright basis on Friday. Clevelend-Cliffs’ shares were down about 2% on the day.

“Cliffs was pretty active; it seemed to get caught up in the trade war conversations,” a trader said.

The company’s straight bonds were trading tighter, but the convertible was lower by about 0.25 point on a dollar-neutral basis.

Given the amount of high-yield debt that is in the energy sector, weaker oil prices could be expected to put pressure on that space, but on Monday there wasn’t much carry through from the price drop. Investment-grade debt was flat and high-yield debt was wider by only 4 basis points.

Mentioned in this article:

Arconic Inc. Nasdaq: ARNC

CalAmp Corp. Nasdaq: CAMP

Cleveland-Cliffs Inc. NYSE: CLF

Encore Capital Group Inc. Nasdaq: ECPG

Redfin Corp. Nasdaq: RDFN

Whiting Petroleum Corp. NYSE: WLL

Zillow Group Inc. Nasdaq: Z

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