DealerTrack up in gray market ahead of final pricing; Stone Energy on tap; iStar higher

By Rebecca Melvin

New York, Feb. 28 - Convertibles players were cheered on Tuesday to see a couple of new deals in the U.S. market, representing the first new paper seen in seven weeks.

DealerTrack Holdings Inc. was higher bid in the gray market at 102 to 103 late in the day prior to final terms. The new paper was valued even higher at 104 based on one New York-based analyst's assumptions, including a credit spread of 500 basis points over Libor and a volatility input of 37% to 40%.

DealerTrack planned to price $150 million of convertible notes after the market close on Tuesday.

Meanwhile, Stone Energy Corp. launched an offering for $250 million of convertible notes late Tuesday that was expected to price late Wednesday.

Both convertible deals are non-callable, five-year notes being distributed under Rule 144A, and they are being done concurrently with convertible note hedge and warrant transactions, which have the effect of boosting the conversion premium from the issuers' perspective.

As for what was behind the small flurry of convertibles - another convertible deal launched offshore Tuesday - market players suggested that perhaps it was the fact that stock prices are finally higher and credit has tightened in recent weeks as well as the fact that earnings season is drawing to a close.

"Time to bring deals," a New York-based trader said.

Another source said, "I think a combination of the low-rate environment and appreciated share prices have made issuers more comfortable with converts. But judging by the proliferation of call spreads in recent deals, issuers still believe their stock prices have more room to grow...."

The source was referring to convertible note hedge and warrant transactions that act to mitigate dilution.

It essentially "creates a synthetic debt instrument with no or low dilution and low coupon," the source said.

Whatever the reasons behind the flow this week, players were relieved to see the new issue drought break.

Offshore, Golar LNG Ltd. sold $250 million of five-year convertible bonds to yield 3.75% with an initial conversion premium of 25%.

Final terms of the Regulation S Golar offering were fixed late Tuesday based on the volume weighted average price of the company's shares on the Nasdaq stock market, subject to a minimum reference of $44.00.

The deal was sold via joint bookrunners ABG Sundal Collier, Arctic Securities and Deutsche Bank AG, with DnB Bank ASA and Nordea Bank Norge ASA acting as co-managers.

The last new deal in the U.S. market was PHH Corp.'s $250 million of 6% convertibles due 2017, which priced on Jan. 10.

Back in the secondary market Tuesday, iStar Financial Inc.'s convertibles jumped after the commercial real estate lender reported a less-than-expected loss for its fourth quarter and launched a syndication of up to $900 million in new senior secured term loans to refinance debt like the iStar convertibles, which mature in October.

Equity indices notched gains on Tuesday with the Dow Jones industrial average rising about 24 points, or 0.2%, and closing above 13,000 for the first time since May 2008.

DealerTrack adds in gray

DealerTrack's $150 million offering of five-year senior convertibles was quiet in the gray market early in the session, but toward the end it was seen between plus 1.5 points to plus 3 points, with most sources seeing a plus 2 to 3 point market.

The DealerTrack deal, talked to yield 1.5% to 2% with an initial conversion premium of 30% to 35%, "wasn't pricing with a lot of juice, but just enough," a New York-based trader said.

The trader suggested a credit spread of 450 bps over Libor and a 30% volatility for modeling, which made the bonds look slightly cheap at the midpoint of talk.

A second source put the credit spread and vol. higher at 500 bps over and up to 40% vol., getting a valuation on the paper at 104.

The source said there were no exact comps for the company, which is a mixture of an auto credit and software services company.

The company, started in 2001, has a pretty good track record, the source said, having primarily grown through acquisitions. It has no existing debt except for operating and capital leases.

It wasn't terribly easy to value the company, the source said, with most of the comps private companies. But given the recent improvement in credit and the company's fundamentals: it provides a "decent layout for dealers and lenders, and decent track record, it should do well."

Final terms on the Lake Success, N.Y.-based automotive retail software services company's deal were seen being fixed after the market close on Tuesday.

In addition to bookrunners Barclays Capital Inc., J.P. Morgan Securities LLC and Wells Fargo Securities LLC, co-managers are Cowen & Co., Craig-Hallum Capital Group, Evercore Partners, KeyBanc Capital Markets LLC and JMP Securities LLC.

The bonds will be non-callable for life with no puts. They will have takeover and dividend protection.

Concurrently with the offering, DealerTrack expects to enter into convertible note hedge and warrant transactions.

A portion of the proceeds of the notes and from the sale of the warrants will be used to fund the cost of the convertible note hedge transactions. Remaining proceeds will be used for working capital and general corporate purposes, which may include repayment of existing debt, acquisitions and investments.

Stone Energy to price

Independent oil and natural gas exploration and development company Stone Energy launched an offering for $250 million of five-year convertible notes late Tuesday that were talked to yield 1.75% to 2.25% with an initial conversion premium of 25% to 30%.

The Rule 144A offering has a $25 million greenshoe and final terms were expected to be fixed after the market close Wednesday.

The non-callable notes have contingent conversion at a price hurdle of 130%.

Stone Energy is also doing a call spread.

Proceeds will be used for general corporate purposes, including possibly longer-term financing for its recently closed Pompano, Wideberth and Appalachian acquisitions and repayment of outstanding borrowings under the company's bank credit facility.

Stone Energy is based in Lafayette, La.

iStar moves higher

iStar's floating-rate convertibles, which come due later this year on Oct. 1, traded at 97.625 on Tuesday and were seen closing at 97.5 bid, 97.75 offered, moving higher with shares initially. But shares of the New York-based commercial real-estate lender pared gains into the close, ending up just 4 cents, or 0.6%, at $7.00, while the convertible retained gains.

The iStar convertibles traded two weeks ago at 93.50.

"They are trading with a pretty wide yield of close to 5%," a New York-based trader pointed out. Most shorter-dated paper like this is trading at 2% to 3% yield."

The company recorded $24 million of loan loss provisions and impairments for the fourth quarter compared to $58 million in loan loss provisions for the fourth quarter of 2010.

The latest results were propped up by a gain of $30 million from the sale of its stake in hedge fund manager Oak Hill Advisors for more than $200 million.

The company launched a syndication of up to $900 million of new senior secured credit facilities to refinance 2012 unsecured debt maturities, with Barclays Capital acting as lead arranger.

The proposed new facilities would be comprised of a 2012 A-1 tranche due March 2016 and 2012 A-2 tranche due March 2017. The two tranches are expected to have differing interest rates. Amortization payments will be applied first to the 2012 A-1 tranche and then to the 2012 A-2 tranche.

Outstanding borrowings under the facilities will be collateralized by a $1,125,000,000 pool of diversified collateral of loans, net lease assets and other real estate assets, including assets net leased to Hilton Hotels and Preferred Freezer.

"This new financing will allow us to better align our asset and liability profile, positioning iStar on stronger footing and creating positive momentum for the coming year," said Jay Sugarman, iStar's chairman and chief executive officer.

The company also said there can be no assurance that it will be successful in its efforts to complete the syndication.

Mentioned in this article:

DealerTrack Holdings Inc. Nasdaq: TRAK

Golar LNG Ltd. Nasdaq: GLNG

iStar Financial Inc. NYSE: SFI

PHH Corp. NYSE: PHH

Stone Energy Corp. NYSE: SGY

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