Morning Commentary: Northern Oil and Gas convertible notes offering eyed

By Abigail W. Adams

Portland, Me., Oct. 11 – While markets remain fragile ahead of a heavy week of economic data, the convertibles primary market returned to action on Tuesday with one new offering on deck.

Northern Oil and Gas Inc. plans to price $350 million of seven-year convertible notes after the market close on Tuesday with price talk for a coupon of 3.375% to 3.875% and an initial conversion premium of 25% to 30%.

The deal was heard to be in the market with assumptions of a credit spread of 500 basis points and a 42% vol., according to a market source.

Using those assumptions, the deal looked about 2 points cheap at the midpoint of talk.

The deal looked attractive even with the dividend on the company’s stock, which yields 3.33%, sources said.

The notes carry dividend protection above 30 cents per quarter.

The deal comes with markets fragile ahead of the latest Consumer Price Index report due Thursday and the big banks launching third-quarter earnings later in the week.

While the primary market activity comes as a surprise given market conditions, companies may be beginning to question why they should wait to raise capital, especially with JPMorgan CEO Jamie Dimon’s recent warning, a source said.

Equity markets remained volatile on Tuesday with indexes launching the day in the red but fighting off their lows and turning mixed as the session progressed.

The Dow Jones industrial average was up 101 points, or 0.34%, the S&P 500 index was down 0.48%, the Nasdaq Composite index was down 0.85% and the Russell 2000 index was down 0.27% shortly before 11 a.m. ET.

There was an uptick of activity in the convertibles secondary space after a sleepy Monday with $70 million in reported volume about one hour into the session.

However, there was a wide breadth to the names in play with few seeing concentrated activity, a source said.

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