Jarden performs well on debut; Meritage above par; Genesee & Wyoming mandatory on tap

By Rebecca Melvin

New York, Sept. 13 - Jarden Corp.'s newly priced 1.875% convertibles due 2018 traded up out of the chute and kept going on its debut in the secondary market on Thursday after pricing late Wednesday at or near the midpoint of price talk.

Jarden's new paper was at 102.625 bid, 102.875 offered versus an underlying share price of $53.53 shortly before the market close, which represented a 2-point expansion on a dollar-neutral, or hedged, basis, according to a syndicate source.

Meritage Homes Corp.'s newly priced 1.875% convertibles due 2032, a much smaller $110 million dollar deal compared to Jarden's $450 million offering, edged up slightly to 100.125, a syndicate source said around midday. The Scottsdale, Ariz.-based homebuilder paper came at the cheap end of talk late Tuesday.

Railroad operator Genesee & Wyoming Inc. was expected to bring a mandatory convertible with a secondary stock offering after the market close. That paper has a soft call provision at 130% of conversion, which sapped some of the value out of it, a New York-based convertibles analyst said.

The $200 million Genesee & Wyoming paper was talked to yield 5% to 5.5% with an initial conversion premium of 17.5% to 22.5%.

The pricing of the new paper was said to be rather expensive for investors and pulling higher because of the lack of supply.

But there were some complaints about the pricing.

"Issuers are having their way with us," a New York-based sellsider said. "Market participants are having to buy stuff that's way too tight, and I'm afraid it's going to end in tears."

But the pickup in new issuance this past week was not yet looking like it impacted existing paper in terms of holders selling older issues, or pressuring prices lower, to make room few new issues.

The latest flurry of issuance was like "a drop of water in a desert," a New York-based trader said.

The secondary market on Thursday was rather unremarkable. Many convertibles moved up along with the underlying equities, which rallied on the heels of the Federal Open Market Committee's surprisingly strong accommodative action announced at the end of its two-day policy meeting.

The Fed action wasn't expected to impact convertibles meaningfully, however, because it was believed that the action was already baked into the markets, one sellsider said.

Strong Fed action taken

The Federal Reserve released its statement around midsession, and as expected, it re-implemented easing measures in what is being referred to as QE3, or a third round of quantitative easing.

Under the measures, the Fed will begin purchases of about $40 billion per month of agency mortgage-backed securities. The length of the bond buying program was left open ended so that the Fed could extend those purchases and buy additional assets for as long as it takes to help improve the U.S. job market.

The Fed also said it would continue Operation Twist, under which it has been selling short-term bonds and using the proceeds to buy longer-term bonds in an effort to bring down long-term interest rates.

In addition, the Fed said that it expects to keep short-term interest rates near zero until at least mid-2015, which extends the period for which low rates are viewed as likely from late 2014, which was the target from the last meeting.

In its announcement, the Fed said that the economy continued to expand at a modest pace in recent months. Growth in employment has been slow and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement.

Jarden adds on debut

Jarden's newly priced 1.875% convertibles due 2018 were seen last at 102.625 bid, 102.875 offered versus an underlying share price of $53.53. Moving on about a 55% to 60% delta, the new paper expanded by about 2 points, sources said.

Several sources thought that the issue was as expensive as it should be, and that it was driven to that level by high demand.

"I didn't get the stock valuation and think outright [players] should wait for a better entry," a West Coast-based trader said. He though that the issue was pretty favorable for convertible arbitrage players.

Valuations of the paper used a credit spread in the mid 300s to about 400 basis points over Libor.

Valuation inputs varied from 375 bps credit spread and 22% vol. and 350 bps credit spread and 25% vol.

One source said he got a par valuation at the midpoint of original talk.

Another source said, "We think at least 400 [bps] was needed."

Given that the pricing was rising with this valuation, players attributed the boost to high demand from paper-starved accounts and not necessarily fundamentals.

One New York-based trader disputed the point, saying, "Demand is part of the pricing equation. If issuance stops again on a dime, then they'll be talking about these being cheap."

Jarden priced $450 million of six-year convertible senior notes after the market close on Wednesday at par to yield 1.875% with an initial conversion premium of 34%.

The Rule 144A deal priced at the talked price point for the coupon and slightly beyond the midpoint of revised talk on the premium, which was 32.5% to 35%. The premium talk was revised during marketing from an original 27.5% to 32.5% premium range.

There is a $50 million over-allotment option for the deal, which was sold via left lead bookrunner Barclays and bookrunner J.P. Morgan Securities LLC.

The notes are non-callable for life with no puts. There is dividend and takeover protection.

The company's board was authorized an increase to the company's stock repurchase program to allow for the repurchase of up to $250 million in common stock.

Up to $125 million of the proceeds of the convertible bond sale will be used to repurchase common stock through negotiated transactions with investors of the convertible bonds. Remaining proceeds will be used for general corporate purposes.

Meritage Homes adds

Meritage Homes' newly priced 1.875% convertibles due 2032 traded at 100.125 around midsession, a syndicate source said. He also said that the paper expanded on a dollar-neutral basis.

Meritage shares opened lower and slipped lower from that point but did a 180 degree turn on news that the Fed is going to begin another round of accommodation.

Meritage shares closed up 83 cents, or 2%, to $40.25.

Homebuilders were boosted by the Fed's plan to buy mortgage-backed securities.

The company priced an upsized $110 million of 20-year convertible senior notes. The amount was increased from an originally announced $100 million, and the convertibles came at the cheap end of talk.

The registered deal was sold by joint bookrunners Citigroup Global Markets Inc., JPMorgan, Deutsche Bank Securities Inc. and Bank of America Merrill Lynch.

The notes are non-callable for five years with puts in years five, 10 and 15.

In its rating on the convertibles, Fitch Ratings said that builder and investor enthusiasm have surged for the most part in 2012. However, Fitch said, national housing metrics have not entirely kept pace.

Year-over-year comparisons have been solidly positive on a consistent basis. Yet, month to month the national statistics (single-family starts, new home, and existing home sales) have been erratic and, at times, below expectations. In any case, year to date these housing metrics are well above 2011 levels.

Fitch has noted that recovery will likely occur in fits and starts. For the first six months of the year, Meritage reported net order growth of 43%, handily exceeding national data and implying market share gains.

Fitch's housing forecasts for 2012 have been raised since early spring but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013.

Genesee & Wyoming to price

The $200 million offering of three-year mandatory convertibles being offered by Genesee & Wyoming, a Greenwich, Conn.-based owner and operator of short line and regional freight railroads, was seen having a credit spread of 500 bps over Libor.

But credit spreads when valuing mandatories is not critical to valuation, a New York-based analyst said.

Instead, he noted that a soft call feature was something that would likely reduce value by 7 or 8 points.

Many sources said that they weren't looking at the new piece of paper because investors weren't that interested in it.

The company is also selling 3.5 million shares of common stock, including 233,996 shares of stock being sold by the chairman of the board of directors.

The registered offering includes a $30 million over-allotment option and is being sold via Bank of America Merrill Lynch, Citigroup and JPMorgan.

Proceeds will be used to fund partially the acquisition of RailAmerica Inc.

Mentioned in this article:

Genesee & Wyoming Inc. NYSE: GWR

Jarden Corp. NYSE: JAH

Meritage Homes Corp. NYSE: MTH

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