Radian Group Inc. on Tuesday increased the size of its convertible senior note offering to $400 million, a $50 million hike from its initial plan.
If the underwriter's option is priced in, the note sale could bring in $450 million.
The offering has an initial conversion price of $11.69 per share, which is 32% higher than the mortgage insurer's closing price of $8.82 on Monday.
After Radian first announced the note sale, its share price fell by 11%. But according to FBR Capital Markets analysts Steve Stelmach and Amy DeBone, investors are likely to view Radian's ability to tap the capital markets – especially with an increased note sale – as a positive development for the company.
Stelmach and DeBone believe Radian's mortgage insurance business is adequately reserved and incurred losses should better correlate with declines in the firm's delinquency inventory.
"All in all, the net positive impact on interest expenses from the new convertible notes and the additional capital flexibility brings more comfort from a valuation standpoint, especially going into what is typically the weakest seasonal quarter of the year for the industry," the analysts said.
They called the additional capital cushion a plus, but added that Radian's risk to capital ratio of 17.2:1 is well above the 25:1 ratio some states require to write business; therefore, they see the primary use of the proceeds as a way to repurchase senior debt.
If $160 million of the proceeds are used to pay down debt that is due in June 2011, and the rest is used to pay off senior notes due in 2013, FBR estimates that Radian would save $13 million on interest expense.
