Yahoo! convertible trades lower outright; Extra Space launches $500 million exchangeable

By Rebecca Melvin

New York, Sept. 14 – The U.S. convertibles market was mostly lower on Monday as equities dipped in thin volume due the Rosh Hashana holiday, traders said.

“There is nothing trading at all; it was the quietest day in the last few months,” a New York-based distressed trader said.

Amid light trading, convertibles felt heavy, he said.

Yahoo! Inc.’s 0% bond slipped below par on an outright basis and also contracted on swap by about 0.25 point, a New York-based trader said.

Elsewhere, the energy sector and China space remained weak.

Market players are still waiting for a bottom in energy prices, a trader said.

China names were also weak after another round of data showed China's investment and factory output in August missed forecasts, indicating sluggish growth for the world’s second largest economy.

SunEdison Inc.’s multiple convertible issues were down with lower shares. The SunEdison 2.75% convertibles were seen around 95.5, which was down from 100. The SunEdison 6.75% convertible preferreds were down to 84.7 from 88ish, and the SunEdison 2% convertibles were seen at 98.25, which was down from 102.

Also weaker with shares were Ctrip.com International Ltd.’s convertibles. The Ctrip 1% convertibles due 2020, or the C tranche, was indicated down at 89.5 at the end of Monday, which was off about 3 points on an outright basis and against the common shares of the Shanghai-based travel services company that were down 4% at $65.89.

The Ctrip 1.99% convertibles due 2025 were indicated down at 88.7, which was down from 92 previously.

Ctrip’s $1.1 billion of C and D convertibles priced in June.

In the primary arena, Extra Space Storage Inc. launched a chunky offering of $500 million of 20-year exchangeable senior notes that were talked to yield 2.625% to 3.125% with an initial exchange premium of 27.5% to 32.5%.

The new deal was expected to price late Tuesday.

Extra Space, a Salt Lake City real estate investment trust of self-storage facilities, has an existing $250 million convertible that it priced in 2013.

In the broader financial markets, there was also a sense of “everyone holding their breath” ahead of the Federal Open Market Committee meeting this week. The expectation is running against the Fed moving to begin to raise rates at this meeting.

“It looks like its 30% [likelihood] that they will raise,” a New York-based trader said, regarding the expectation that the U.S. central bank will begin to move off its near 0% benchmark Fed Funds rate that has stood pat for nearly a decade.

“Everything feels pretty weak. Even if they don’t raise rates, I wouldn’t be surprised if things don’t scream higher,” he said.

The market has been feeling heavier since August. Returns were negative for many and now “especially into the end of the year, nobody wants to buy anything,” the trader said.

“People have taken losses. There have been redemptions. People are lining up to sell anything yield to call,” the trader said. And bad performers are being held onto in hopes that they will rebound.

Yahoo! slips back below par

Yahoo!’s 0% convertibles were trading in the 99.25 to 99.50 context on Monday after slipping from about 100.5 on Friday, according to Trace data. The bonds also traded in the mid 90s last week.

The paper was lower as investors continue to weigh weakness and the implications of Yahoo!’s potential spinoff of its stake in Alibaba Group Holdings Inc., a New York-based trader said.

The Yahoo! 0% convertibles due 2018 traded 88.5 and were in the mid 90s last week, the trader said.

Yahoo! shares fell $1.25, or nearly 4%, to $30.18 on Monday.

Yahoo’s planned spinoff of its stake in Alibaba is pending as the company weighs tax issues. Meanwhile a Barron’s story said Alibaba could fall another 50% as the Chinese economy struggles and the company loses market share. Also contributing to share weakness are changes in company management. On Friday, it was announced that chief marketing officer Kathy Savitt is leaving. A week earlier there was news that chief accounting officer Aman Kothari is leaving.

Extra Space on tap

The Rule 144A deal from Extra Space is of the long-anticipated $500 million size variety. The 20-year exchangeable senior notes were seen pricing after the market close Tuesday.

There is an over-allotment option for a further $75 million of notes.

The offering was being sold via joint bookrunning managers Citigroup Global Markets Inc. and Wells Fargo Securities LLC.

Proceeds will be used to fund potential acquisitions, including its previously announced acquisition of SmartStop Self Storage, Inc., to retire outstanding debt and for other general corporate and working capital purposes.

The exchangeables will be non-callable for five years. They are putable in years five, 10 and 15.

The exchangeables have dividend protection for any dividends paid above $0.59 per share and takeover protection. They also have net share settlement.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Extra Space Storage Inc. NYSE: EXT

SunEdison Inc. Nasdaq: SUNE

Yahoo! Inc. Nasdaq: YHOO

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