Morning Commentary: Downsized Starwood rises from discount; Salix flat to lower; Red Hat up

By Rebecca Melvin

New York, Oct. 3 – Starwood Property Trust, Inc.’s newly priced 3.75% convertible due 2017 traded up from its discounted reoffered price early Friday, but it was still below par, after the Greenwich, Conn.-based commercial and real estate finance company priced a reduced version of a planned dual-tranche deal launched Thursday.

The new Starwood 3.75% convertibles were trading at 99.5 around midmorning with the underlying shares higher by about 1%, a New York-based trader said.

Starwood priced $375 million of the 2017 notes and skipped a second five-year tranche, which combined was to total $500 million.

Starwood’s existing 4% convertibles due 2019 traded a 106.79 early Friday, according to Trace data. That was up from lows notched Thursday of around 104.7 but below where it was trading before the deal was launched at 109 plus.

Elsewhere, Salix Pharmaceuticals Ltd.’s 1.5% convertibles were last essentially unchanged after news that the Raleigh, N.C.-based drug company has scuttled a planned merger with Italy’s Cosmo Pharmaceuticals SpA, following new U.S. Treasury Department rules aimed at cracking down on so-called inversion deals.

Under the Cosmo merger, Salix planned to take advantage of lower overseas corporate tax rates by moving its domicile abroad.

Salix, which has other irons in the fire including a potential link up with Allergan Inc. – but Allergan was said to have most recently stepped away from a possible deal – saw its stock move up on the Cosmo news. The stock was last up $5.41, or 3.6%, at $156.46.

The Salix bonds were quoted at 239.50 bid, 240.25 offered with the stock at $154.85.

A third player in the Salix-merger mix is Actavis plc. “The question is what happens ultimately with ACT,” a trader said.

Also Red Hat Inc.’s 0.25% convertibles, which debuted in the market Thursday, traded higher at 103.3 versus a share price of $59.06.

There was a “large buyer” of the name, a New York-based trader said, adding that the new paper has now expanded 1.5 points from the issue price.

In the broader markets, equities bounced higher, encouraged by the U.S. September jobs report, which showed that nonfarm payrolls grew at a better-than-expected 248,000 jobs and helping pull the U.S. unemployment rate below 6% for the first time since the middle of 2008, the Labor Department said.

Economists had expected payrolls to rise to 215,000 for the month and the unemployment rate to stick at 6.1%.

In addition, the report’s revisions to the summer months were encouraging. In August, 180,000 jobs were added instead of the initially reported 142,000 positions, the Labor department said, and July saw the creation of 243,000 jobs, up from an initial estimate of 212,000.

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