Rayonier opens up; iStar falls flat; Edge Petroleum nosedives; Lockheed Martin, Ford up big on news

By Evan Weinberger

New York, Oct. 11 - Two new deals from iStar Financial Inc. and Rayonier Inc. entered the market Thursday to varying levels of success - one was active but flat, the other was quiet but traded higher.

Edge Petroleum Corp. and Chesapeake Energy Corp. convertibles moved in opposite directions. Meanwhile, in the defense sector, Lockheed Martin Corp. convertibles were relatively active and moved up.

Ford Motor Co. convertibles surged on labor news.

Finally, Beazer Homes USA, Inc. convertibles held firm despite the company being forced to restate earnings as far back as 2004.

One new deal was sitting at the starting gate at market close. Morgans Hotel Group Co. was set to price $100 million in senior subordinated convertible notes due 2014 after the close Thursday after launching them Wednesday. The convertibles are talked at a yield of 2.25% to 2.75% and an initial conversion premium of 17.5% to 22.5%.

There is a $15 million greenshoe and a contingent conversion subject to a 130% hurdle. There is call protection for the life of the convertibles and there are no puts.

Morgans is a New York-based boutique hotel chain. The company plans to use the proceeds to pay down in full its revolving credit facility, to enter into hedged transactions and for general corporate purposes.

According to market watchers, the deal may not garner much interest because of its size. "I don't think there'll be too many fireworks on that one," one analyst said.

The analyst did say that the convertibles offering appeared cheap to him, in keeping with the theme of most of the recent new issues.

Equity markets were far from an irresistible force when they slammed into an immovable object Thursday. After flying significantly higher for most of the day, all three major indexes slumped into negative territory late in the afternoon on inflation concerns and a downgrade from JPMorgan on a Chinese internet company. In addition, retailers reported poor September sales figures.

The Dow Jones Industrial Average was up around 100 points before tanking, closing down 63.57 points, or 0.45%, at 14,015.12.

The Nasdaq was up before it was down, closing at 2,772.20, a loss of 39.41, or 1.40%. Concerns about the tech sector even brought Google Inc. down $3.39, or 0.54%, to $622.

The Standard & Poor's 500 wasn't spared the roller coaster ride. It lost 8.06 points, or 0.52%, to close at 1,554.41.

Convertibles trading followed a similar pattern. "There was a lot more buy interest earlier in the day. It kind of petered out later," one analyst said.

New deals open mildly

iStar's upsizing to $800 million its offering of senior unsecured floating-rate notes due Oct. 1, 2012 was seen as a sign of tremendous interest in the floaters. But trading action was anemic.

The floaters have a coupon of three-month Libor plus 50 basis points and a 30% conversion premium.

The coupon and conversion premium came in at the mid-range of talk. Talk set the coupon at three-month Libor plus 25 to 75 basis points and a 28% to 32% initial conversion premium.

The deal was originally announced at $500 million. The greenshoe was upsized to $120 million from $75 million.

The new notes were active in the market, with one trader saying that it was among the big movers of the day. But they closed at around par versus a closing stock price of $34.50.

iStar stock (NYSE: SFI) closed up 68 cents, or 2.01%, Thursday.

iStar is a New York-based commercial REIT that specializes in financing commercial real estate. The REIT plans to use the proceeds to repay borrowings on a credit facility it obtained for the acquisition of Fremont General Corp.'s commercial real estate lending business. That deal was announced in May. Any remaining proceeds will be used to repay other existing indebtedness.

"There's clearly a lot of interest in the deal, and I'm surprised that after it came to market it just fell down," an analyst said.

Rayonier, on the other hand, only upsized its greenshoe from $37.5 million to $50 million, leaving the rest of the deal unchanged. The $250 million in senior unsecured exchangeable bonds due Oct. 15, 2012 came in at a 3.75% coupon and a 22% initial conversion premium Wednesday after market close. The exchangeables came in at the rich end of talk, which had been a coupon of 3.75% to 4.25% and an initial conversion premium of 18% to 22%.

The conversion price is $54.81 and the conversion ratio is 18.2433.

The exchangeables have no calls or puts. There is full takeover and dividend protection and a contingent conversion subject to a 130% hurdle.

And while the Rayonier exchangeables weren't terribly active - there were a few trades early and then they sat, several observers said, although they did finish higher.

The exchangeables closed at 102.5 versus a closing stock price of $45.67.

Rayonier stock (NYSE: RYN) also had an up day, gaining 74 cents, or 1.65%.

Rayonier is a real estate investment trust, timberland management and cellulose fiber producer based in Jacksonville, Fla. The company plans to use the proceeds to pay down debt, enter into exchangeable hedged transactions and for general corporate purposes.

Edge down on production problem

Drilling problems at sites in Texas, Mississippi and Arkansas caused Houston-based independent oil and gas driller Edge Petroleum to cut back its production forecast for the third quarter earlier in the week, and the stock has suffered.

Not immune is Edge's 5.75% perpetual convertible preferred stock (Nasdaq: EPEXP), which lost $1.50, or 3.78%, Thursday for a $38.22 close. The preferreds began their tumble Monday after the drilling problems were announced. After closing Friday at $47.87, they closed Monday at $41.70 and have drilled lower ever since.

Edge stock (Nasdaq: EPEX) closed down 78 cents, or 8.48%, Thursday at $8.42.

Staying with independent oil and gas drillers, Oklahoma City-based Chesapeake Energy saw its 2.75% contingent convertible senior notes due Nov. 15, 2035 move in the other direction. The convertibles closed Thursday at 113.06 versus a closing stock price of $37.19. They closed Wednesday at 112.882 versus $37.13.

Chesapeake stock (NYSE: CHK) added 6 cents, or 0.16%, Thursday.

Lockheed Martin flies with new contract

Bethesda, Md.-based defense contractor Lockheed Martin soared after being awarded a surveillance contract by the U.S. military.

The company's Libor minus 25 basis points cash-to-zero convertible senior unsecured floating rate notes due Aug. 15, 2033 closed Thursday at 156.604 versus a closing stock price of $111.88. That was improved from Wednesday's finish at 154.591 versus $110.74.

Lockheed Martin stock (NYSE: LMT) gained $1.14, or 1.03%, Thursday.

Ford up on labor talks

Ford saw its stock and convertibles shoot up Thursday as the beleaguered Dearborn, Mich.-based car maker heads into labor talks with the United Auto Workers. Now that both General Motors Corp. and Chrysler have agreed to deals with the UAW, analysts expect the talks with Ford to be short. UAW representatives said they did not expect a strike at Ford, as happened with GM and Chrysler.

Ford's 4.25% convertible senior notes due Dec. 15, 2036 closed at 119.25 versus a closing stock price of $8.76 Thursday. They closed Wednesday at 114 versus $8.23.

Ford stock (NYSE: F) added 53 cents, or a robust 6.44%.

Beazer says, 'Whoops!'

Atlanta-based homebuilder Beazer Homes announced Thursday that it would have to restate its earnings as far back as 2004 after an internal audit turned up accounting errors. That probe ran deep and also uncovered violations of federal housing laws.

Unfazed investors sent Beazer stock bounding higher, on relief that none of these findings were unexpected. And Beazer's 0.625% convertible senior notes due June 15, 2024 nudged forward, closing at 74.849 versus a closing stock price of $10.13. They finished Wednesday at 74.8274 versus $9.93.

Beazer stock added 20 cents, or 2.01%, in trading Thursday.

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