New Colony mostly flat, old Colony 'comes in'; Emergent looks 'fine'; China names in focus

By Rebecca Melvin

New York, Jan. 23 - Colony Financial Inc.'s newly priced 3.875% convertibles traded flat to weaker on an outright basis, but in line on a hedged basis on their debut in the secondary market Thursday after the Santa Monica, Calif.-based real estate investment trust priced $200 million of the new bonds in an overnight deal at the midpoint of talk.

Colony's existing 5% convertibles due 2023, which priced last April, dropped a point or more on both an outright and dollar-neutral basis, as investors eyed the newer, shorter-dated issue more favorably than the older one, sources said.

"The new one is shorter [dated] than the old one; that never helps," a Connecticut-based trader said of the Colony convertibles.

Also in the primary market, Emergent BioSolutions Inc.'s $200 million of seven-year convertibles were in focus ahead of terms seen being fixed after the market close. The deal was modeling a couple of points cheap at the midpoint of talk, but there was no gray market in the issue, sources said. Meanwhile, shares of the Rockville, Md.-based biopharmaceutical company got hammered, falling $2.86, or 11%, to $23.55 on the day.

A couple of distressed names were fairly active. There were bidders in Molycorp Inc.'s 3.25% convertibles and that bond was up about 0.5 point to 76.5 on the day, a Connecticut-based trader, calling them "better to buy."

Endeavour International Corp.'s 5.5% convertibles were trading mostly in line with the underlying shares of the Houston-based oil and natural gas company, adding about a point from previous trades, the trader said, adding "they were busy."

Elsewhere, traders were watching China-related names as the American Depositary Shares of those companies fell amidst accounting concerns and disappointing economic data in China.

"Those stocks are getting slaughtered on accounting concerns," a New York-based trader said of the China shares.

A U.S. Securities and Exchange Commission judge Wednesday ruled against the Chinese units of the Big Four accounting firms, based on alleged failure of the firms to provide documents related to SEC investigations of China-based firms. The SEC ruling argues the accountants should be barred from auditing U.S.-listed companies for six months.

In the early going, a level on Qihoo 360 Technology Co. Ltd.'s 2.5% convertibles due 2018 was 111.25 bid, 112.25 offered, with shares of the China PC and mobile internet security products provider down about 3% at $92.70, a New York-based convertibles analyst said. Earlier this month, the Qihoo convertibles traded at 111.75 with the shares at $87.17.

Other China names in the convertible space include NQ Mobile Inc.'s 4% convertibles due 2018, which traded at about 83 earlier this week. That marked an improvement from a drop to near 50 for those convertibles amid fraud allegations shortly after they were issued last fall.

Ctrip.com International Ltd., a Shanghai-based travel service provider, has 0.5% convertibles, which were lower by about a point dollar-neutral to 93.5 bid, 94 offered with the shares at $41.00, a trader said. Also in the sector is E-House (China) Holdings Ltd., a Beijing-based real estate services company, which priced 2.75% convertibles at a discount to par of 97.5 in December.

New Colony in line

Colony Financial's newly priced 3.875% convertibles traded in line on mostly an outright basis, ending the session at about 99.75 bid, 100.125 offered, a New York-based trader said.

Shares of the California-based REIT ended down 19 cents, or 0.9%, at $21.87.

The convertibles were trading primarily on an outright basis, the trader said.

Levels was steady throughout the session.

But the older Colony convertibles came in about a point on a dollar-neutral, or hedged, basis, the trader said.

The Colony 5% convertibles due 2023 traded down to about 105.5. They had changed hands previously at 108.

"They priced right on top of each other," the trader said, referring to the fact that the older issue was completed only nine months ago.

He said what happened with the pricing of the Colony convertibles is fairly typical of the business development, private equity-type names such as Ares Capital Corp., which tend to price multiple issues.

"Naturally, with the new debt deal, spreads would widen out on the other issues, and particularly in this space," the trader said.

"The hedge funds get big allocations of the new one and peel out of the old one," he said. "But there was no mass rush for the exits."

He referred to the last Ares Capital convertible that priced, which took the older paper down a point or more. "It was the same thing with the Starwoods," he said, referring to Starwood Property Trust Inc.

Another factor contributing to weakness in the older Colony was that the older one is longer-dated than the new one.

Colony's new 3.875% convertibles, which priced at the midpoint of terms, were quoted at 99.5 bid, 100.25 offered in the early going, and also at 99.75 bid, 100.25 offered with the underlying shares at $21.86, according to convertibles traders.

The $200 million of seven-year convertible senior notes priced at par with an initial conversion premium of 12.5%.

There is a $30 million greenshoe for the registered, off-the-shelf deal that was sold via Morgan Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and BofA Merrill Lynch.

The bonds are non-callable for five years until Jan. 22, 2019, and then are provisionally callable if the company's shares trade above 130% of the conversion price. The bonds have takeover protection.

Proceeds will be used to repay amounts outstanding under the company's secured revolving credit facility, with remaining proceeds intended to acquire target assets and for working capital and general corporate purposes.

Emergent looks cheap

There was no gray market in the planned Emergent BioSolutions deal, traders said. But it was looking about 2.5 points cheap at the midpoint of talk, using a credit spread of 550 basis points over Libor and a 30% vol., a New York-based trader said.

A second source said a tighter credit spread of 500 bps over was fair. "And they will trade better than that," he said.

"They will do fine. It's an interesting company that lends itself to a convert," the source said.

The company develops immunobiotics for use against biological agents and infectious diseases.

It planned to price $200 million of the seven-year convertible senior notes after the market close Thursday at 2.625% to 3.125% coupon and 27.5% to 32.5% initial conversion premium.

The Rule 144A offering has a $30 million greenshoe and was being sold via BofA Merrill Lynch and J.P. Morgan Securities LLC.

The bonds are non-callable for three years and then are provisionally callable if shares exceed 130% of the conversion price. There are no puts.

Proceeds will be used to finance a previously announced acquisition and for general corporate purposes.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Colony Financial Inc. Nasdaq: CLNY

E-House (China) Holdings Ltd. NYSE: EJ

Emergent BioSolutions Inc. NYSE: EBS

Endeavour International Corp. NYSE: END

Molycorp Inc. NYSE: MCP

NQ Mobile Inc. NYSE: NQ

Qihoo360 Technology Co. Ltd. Nasdaq:QIHU

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