Convertibles drop in line with equity sell-off; planned iStar offering looks fair to cheap

By Rebecca Melvin

New York, Nov. 7 - The convertible bond market traded down Wednesday, in line with underlying equities, which sold off sharply on the heels of president Barack Obama's re-election Tuesday.

"There is nothing extraordinary, outside of equity price moves," an East Coast-based buysider said of Wednesday's session.

iStar Financial Inc. launched an offering of $100 million of four-year notes ahead of the market open that were expected to price after the market close.

The commercial real estate lender was pricing a concurrent issue of $250 million of straight notes.

The convertibles piece looked to be fair value or somewhat cheap, market sources said.

After the market close, Ares Capital Corp. announced that it priced $40 million of notes in a reopening of its 4.75% convertibles due 2018. The original $230 million issue priced on Oct. 10.

Back in the secondary market, coal names were said to be weaker with Alpha Natural Resources Inc.'s 3.25% convertibles in about a point, a Connecticut-based trader said.

Endo Health Solutions Inc.'s convertibles were slightly lower. The Chadds Ford, Pa.-based specialty drug maker missed quarterly revenue estimates and cut full-year guidance on Monday.

BroadSoft Inc.'s convertibles were quiet despite a bounce in the underlying shares of the Gaithersburg, Md.-based software maker. The stock fell as much as 18% on Tuesday on a revenue miss, and the convertibles looked to have moved down in line to slightly better on a dollar-neutral, or hedged, basis.

Equities slumped after Election Day. The Dow Jones industrial average fell 312.95 points, or 2.4%, to 12,932.73; the S&P 500 stock index fell 33.86 points, 2.4%, to 1,394.53, and the Nasdaq composite stock index lost 74.64 points, or 2.5%, to 2,937.29.

iStar Financial launches deal

iStar planned to price $100 million of convertibles that were seen pretty much fair value to somewhat cheap.

One buysider commented that the deal was pretty small and not something that he was interested in getting allocations in. Although he said it looked about fair value using a credit spread of 650 basis points over Libor with a 30% vol.

A second source said he got them 3% cheap using a tighter spread and the same vol.

The commercial real estate lender plans to sell the four-year convertibles after the market close Wednesday that were talked to yield 3% to 3.5% with an initial conversion premium of 37.5% to 42.5%.

The registered, off-the-shelf offering has a $15 million greenshoe and was being priced concurrently with $250 million of six-year senior straight notes.

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

Bank of America Merrill Lynch, Barclays and J.P. Morgan Securities LLC are the joint bookrunners of both the convertible and straight notes.

Proceeds are expected to be used to redeem $67 million principal amount of iStar's 6.5% senior straight notes due 2013 and a portion of its 8.625% senior straight notes due 2013.

iStar shares ended the session down 22 cents, or 2.5%, at $8.27.

iStar, based in New York City, formerly had floating-rate convertibles, which were due Oct. 1.

Endo Health steady to lower

Endo Health's 1.75% convertibles due 2015 traded at 110 early Wednesday, which was down compared to 110.875 late Tuesday. The paper had been about 10 points higher a few weeks ago.

Shares of Endo Health were off 17 cents, or less than 1%, at $26.31 after dropping Monday and Tuesday.

On Monday, the company said net sales of its Opana ER drug fell 36% to $62.2 million in the third quarter.

Meanwhile, the company's Lidoderm pain patch, and its biggest revenue maker, is set to face competition starting September 2013.

The company said third-quarter net income grew to $54 million, or 45 cents per share, from $41 million, or 34 cents per share, in the year-earlier period.

Excluding items, Endo earned $1.25 per share. Total revenue fell 1% to $750.5 million. Analysts had expected the company to earn $1.28 per share on revenue of $788.3 million.

The company also lowered guidance for the second time in two months. It said it now expects to earn between $5.00 and $5.10 per share for 2012, which is down from its previous guidance of $5.20 to $5.40.

The company's revised revenue forecast for the year is $3.05 billion, compared to a previous range of $3.0 billion and $3.2 billion.

BroadSoft quiet

BroadSoft's 1.5% convertibles due 2018 were seen around 102, after dropping to 101.5 to 102 on Tuesday.

BroadSoft shares bounced $2.75, or 9%, to $32.56 in active trade Wednesday after sliding on Tuesday.

The equity of the Gaithersburg, Md.-based software maker "was slapped hard on earnings," a New York-based trader said of Tuesday's move.

He said that on a dollar-neutral basis, adjusting to a $30 share price, the convertibles came to 100.75 to 102.25, using a 75% delta, and the bonds actually traded at the high end of that range.

Prior to Tuesday's drop, the bonds traded on a 75% to 80% delta.

The company reported revenue of $40.2 million for its third quarter, up 13% from a year ago, but below consensus estimates of $41.5 million.

Adjusted earnings were 35 cents a share, topping expectations for 32 cents a share.

Looking ahead, the company sees fourth-quarter revenue of $43 million to $48 million and non-GAAP profits of 33 cents a share to 48 cents a share. That compares to the consensus estimate of revenue of $45.9 million and earnings of 43 cents.

For the full year, the company sees revenue of $162 million to $167 million and non-GAAP profits of $1.30 a share to $1.45 a share, compared to consensus that was $166.3 million and $1.37 per share.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

BroadSoft Inc. Nasdaq: BSFT

Endo Health Solutions Inc. Nasdaq: ENDP

iStar Financial Inc. NYSE: SFI

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