Planned JDS Uniphase deal in focus; Starwood trades lower; REITs weaker; Hertz active

By Rebecca Melvin

New York, Aug. 15 - JDS Uniphase Corp. caught the eye of market players early Thursday after the San Jose, Calif.-based network equipment company launched an offering for $575 million of 20-year convertible senior notes that was seen fair value to 2% to 3% cheap, according to sources.

Strong demand for new paper, especially for a deal of this size, led some to speculate that the deal would be upsized before final terms were fixed.

Elsewhere, negative sentiment related to interest rates ticking up to a two-year high Thursday led to weakness in some rate-sensitive convertible names like Starwood Property Trust Inc., a Greenwich, Conn.-based mortgage loan investor. Real estate investment trust names were also weak, sources said.

"A lot of the REITs were quoted lower and traded lower," a Connecticut-based trader said.

A second New York-based trader said, "We're staying away [from REITs], they have come in with the rate move; we're focusing on in-the-money names."

The market overall was soft with equities sharply lower amid disappointment over some weak corporate results including those from Wal-Mart and fears about trimming anticipated in the U.S. Federal Reserve's bond-purchasing program.

But the convertible bond market's trading volumes improved on the day, and there were pockets of strength, especially in in-the-money names, a New York-based trader said.

Hertz Global Holdings Inc.'s 5.25% convertible were down on an outright basis, but were trading a little higher than the price the Park Ridge, N.J.-based rental car company paid holders to convert their bonds into shares, the trader said.

Goldcorp Inc. was also better as shares of the Canadian gold and precious metals mining company continued to surge. The stock gained 6% on Thursday, and in the last week, shares have jumped about $5.00, or 25%.

Goldcorp's 2% convertibles traded at 101.875, and market players are starting to put them on a small delta of about 10%, a trader said.

Meanwhile, AMR Corp.'s 6.25% convertibles due 2014 quieted from their intense activity of the past two days. During that time, the bonds slumped more than 20 points on word that the U.S. government filed a lawsuit to block the bankrupt carrier's proposed merger with US Airways Group Inc.

On Thursday, the AMR convertibles were about 92 bid, 93 offered, compared to 94 bid, 95 offered late Wednesday. The bonds had fallen as low as 89 in the aftermath of the anti-merger news, which was down from about 116 before the bombshell.

Equities sold off sharply. The Dow Jones industrial average closed down 225.47 points, or 1.5%, to 15,112.19, after a 113-point slide Wednesday; the S&P 500 stock index fell 24.07 points, or 1.4%, to 1,661.32; and the Nasdaq stock market lost a whopping 63.16 points, or 1.7%, to 3,606.12, following a 15-point decline Wednesday.

JDS Uniphase fair to cheap

JDS Uniphase's $575 million of convertible bonds were heard modeling 2% cheap at the midpoint of talk using a credit spread of 350 basis points over Libor and a 38% vol.

The bonds were talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 35% to 40%.

A second source said the bonds modeled fair at the midpoint of talk using a credit spread of 350 bps and 37% vol.

Two other sources were using 35% vol., which was the listed realized vol.

"I'm a lot tighter on spread [than 350 bps], and using 35% vol.," a Connecticut-based convertibles analyst said. "I am getting them around 3.9% cheap, but I may raise my spread a touch."

Yet another source got the deal at 102.5 using a credit spread of 350 bps over Libor and 35% vol. at the midpoint of talk.

The Rule 144A offering was being sold via joint bookrunners J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC and has a $75 million over-allotment option.

Wells Fargo Securities LLC, Stifel Nicolaus & Co. Inc. and BofA Merrill Lynch were among the deal's co-managers.

The notes are non-callable until Aug. 20, 2018. There are puts on Aug. 15, 2018, Aug. 15, 2023 and Aug. 15, 2028.

"Guys are going to like it," a Connecticut-based trader said, adding that he saw hedge funds buying the paper in the gray market ahead of final terms being set. Other sources said they hadn't seen the deal in the gray market.

"They were afraid they would be squeezed out of allocations skewed toward outrights," he said of the hedge funds. He quoted the gray market at just over 101.

The company plans to use up to $100 million of proceeds to repurchase shares of its outstanding common shares, with remaining proceeds earmarked for general corporate purposes, including potential strategic transactions.

With the sale of notes, the company plans to terminate its existing $250 million revolving credit facility, which currently has no amounts outstanding.

JDS Uniphase had a 1% convertible due 2026 that has already been called.

JDS shares ended down 78 cents, or 5.5%, at $13.45 on Thursday.

The Network equipment testing company reported lower revenue on weak demand earlier this week.

The company reported profit of $92.5 million, or 38 cents per share, for the most recent quarter, compared with a loss of $22.2 million, or 10 cents per share, a year earlier.

Revenue fell 3% to $421.3 million.

Starwood contracts

Starwood's 4% convertibles due 2019, a $400 million issue that priced in June, was trading pretty actively at 106.5 bid, 107 offered versus an underlying share price of $25.66 on Thursday.

"There was good two-way flow in this issue," a New York-based convertibles analyst said, adding that they were about 0.5 point lower on a dollar-neutral basis, assuming a 55% delta.

The older Starwood 4.55% convertibles were not as active but were also seen 0.5 point lower on a dollar-neutral basis, on a level of 105.5 bid, 106 offered versus a share price of $25.66.

"These are pretty rate sensitive. They kind of retraced their move over the last few days with rates 6 bps to 10 bps wider this morning. They move 3 cents for every bp move in yield," the analyst said.

Hertz a little above parity

Hertz's 5.25% convertibles due 2014 traded around 300.5 on Thursday, which was down 5.3 points outright but a little bit better than parity.

That level was also a little bit better than what the company offered to pay holders to convert the bonds.

The Park Ridge, N.J.-based rental car company said that it entered into privately negotiated agreements with certain holders of the 5.25% notes on Monday in which holders agreed to convert all the notes they held at the indenture rate of 120.6637 shares of Hertz per convertible bond.

The transactions were with holders of about $213.9 million of the $474.7 million of bonds outstanding, the company said.

Hertz anticipates that transactions will result in the issuance of about 25.8 million in shares, and that it will also pay about $6.4 million in cash to settle the conversions of the convertibles.

"The company is paying parity plus 3, and we were trading the bonds at a little above that," a New York-based trader said. "It was a busy name."

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

JDS Uniphase Corp. Nasdaq: JDSU

Hertz Global Holdings Inc. NYSE: HTZ

Starwood Property Trust Inc. Nasdaq: STWD

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