SL Green trades below par after pricing at a discount; Equinix drops hard after warning

By Rebecca Melvin

New York, Oct. 6 - SL Green Realty Corp.'s $300 million of seven-year exchangeable senior notes priced ahead of the market open on Wednesday and came at a discount to par at 99.25.

The new SL Green 3% notes traded early at 99 but spent most of the session at 99.25 bid, 99.5 offered. Some market players thought the new deal was cheap, but others said they didn't like the real estate investment trust issue's long tenor and 3% coupon.

Equinix Inc. was another actively traded name in the convertibles space on Wednesday, with the company's three convertible issues slumping along with a 33% plunge in their underlying shares after the Foster City, Calif.-based data center service provider cut its revenue outlook because of lost North American customers and said it will cut its prices.

Elsewhere, AMR Corp. and United Continental Holdings' convertibles were quoted in trade.

Northgate Minerals Corp.' s new 3.5% convertibles due 2016, which priced Sept. 29, traded at 101.75 versus a share price of $2.95 and were later seen at 100.7.

In the primary market, Mentor Graphics Corp. priced $20 million of convertible subordinated debentures due 2026 in a private placement with a coupon of 6.25% with an initial conversion premium of 65%.

In the broader markets, stocks were mixed as gold hit another new record following the most recent ADP report that showed the private sector shed 39,000 jobs in September. Gold has been pushing up amid momentum buying and currency fears.

Gold for December delivery closed $7.40 higher to $1,347.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,351 and as low as $1,340 during Wednesday's session.

SL Green prices at discount

SL Green's newly priced 3% convertible spent most of the session at 99.25, which was its discounted issue price. But the paper also traded at 99 and 99.50.

The seven-year exchangeable senior notes, which were issued by SL Green's SL Green Operating Partnership LP, have a 3% coupon and a 30% initial conversion premium.

The overnight deal went out with pretty much set terms and the discount came as a means to get the deal done. And yet there were those who believed the paper was cheap.

Assuming a credit spread of 425 basis points over Libor and a 27% vol., the paper modeled 102.61 versus a share price of $64.45, a New York-based sellside trader said.

He said some of his accounts didn't want to get involved in the REIT paper, but his firm did trade it fairly actively.

SL Green has an existing 3% exchangeable due 2027 that was quoted at 97.75, and one sellsider saw the sister paper higher at 98.50 bid, 99.25 offered.

A former SL Green 4% bond was pretty much all gone, sources said.

"It didn't trade a crazy amount in the secondary," a syndicate source said of the new SL Green paper, citing the fact that some market players steer clear of REIT names in general due to the fact that they are traditionally low vol. names and they pay a big dividend.

REIT names lack appeal

And SL Green's sector was mentioned as a deterrent.

"I didn't like the deal," a New York-based sellside trader said. "I just don't think it holds up in the long term."

"It got done because we need paper; but I hope that other paper is not priced like this," he said, citing the seven-year term, and 3% coupon of a REIT that got done overnight with the stock getting hit.

Shares of the New York-based REIT that focuses on Manhattan commercial properties came off Tuesday and on Wednesday shed another $1.64, or 2.5%, to $64.37.

"They have an implied vol. in the mid 20s, but I think it should have come at a 22 vol., not a 26 vol.," the sellsider said.

Presumably interest rates are going to be coming up at some point, and then this paper is going to look worse, he said.

REITs were expected to issue a lot of convertible paper this year, and the amount to date is lower than expected, and this sellsider suggested it is because they lack appeal for investors.

A second sellsider said, "A lot of my accounts stayed away. People don't like the stock risk associated with this kind of deal, although these were a bought deal reoffered below par."

The SL Green notes, which came at the talked terms, came at a 0.75 point discount to par, at 99.25.

There is an over-allotment option for up to an additional $45 million of notes.

Citigroup Global Markets Inc. was the bookrunner of the Rule 144A offering.

Equinix slumps on warning

Equinix's 2.5% convertibles due 2012 traded at 101.25 versus a share price of $71.00 on Wednesday, which was down from 108 versus an $85.00 stock price on Monday.

The Equinix 3% convertibles due 2014 traded at 96 versus a share price of $71.00, which compared to 111 on the offer side on Monday.

Equinix's 4.75% convertibles due 2016 were quoted at 114 versus a share price of $70.00, although the pricing source hadn't seen them in trade Wednesday; and that compared to Monday when the Equinix 4.75% convertibles were at 143 versus a share price of $102.85.

Shares of the data center services provider plunged $34.75, or 33%, to $70.34 on Wednesday after dropping in after-hours trade on Tuesday.

The company said it expects third-quarter and full-year revenues to fall below the company's previous outlook. The company now expects third-quarter revenue to be in the range of $328 million to $333 million, the midpoint of which is 2.2% lower than the midpoint of its previous outlook.

Total revenue for the full year is now expected to be about $1.215 billion, which is 1.2% lower than the previous outlook, which had been provided July 28.

However, the company also expects third-quarter and full-year adjusted EBITDA will be above the company's previous outlook.

For third quarter, Equinix is increasing its adjusted EBITDA expectation to greater than $140 million; and for the full year, the adjusted EBITDA outlook is being increased to about $540 million.

This increase is due in part to better-than-expected gross margins and lower-than-expected cash selling, general and administrative expenses, the company said in its release.

Mentor prices $20 million

Whether Mentor Graphics' new 6.25% convertibles due 2026 are an add-on to an existing issue or a new issue was debated by market players.

The debentures were issued to qualified institutional buyers under Section 4(2) of securities law, according to a Wednesday news release. But one sellsider said that the terms are identical to an existing issue, so he considers it an add-on, and there was no color and no volume in the name to report.

Wilsonville, Ore.-based Mentor Graphics provides software used in electronic design.

Mentioned in this article:

AMR Corp. NYSE: AMR

Equinix Inc. Nasdaq: EQIX

SL Green Realty Corp. NYSE: SLR

Mentor Graphics Corp. Nasdaq: MENT

Northgate Minerals Corp. NYSE: NXG

United Continental Holdings NYSE: UAL

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