NorthStar adds slightly on debut; Central European Distribution drops again; Old Republic lower

By Rebecca Melvin

New York, March 4 - NorthStar Realty Finance Corp.'s newly priced 7.5% convertibles due 2031 traded slightly higher on their debut in secondary trading Friday after the upsized $150 million deal priced on the cheap end of talk late Thursday.

The new NorthStar convertible traded as high as 101 bid, 101.5 offered but was later seen lower at par to 100.5, with the underlying stock flat to slightly lower in steady trade pretty much all day, according to a syndicate source.

Central European Distribution Corp.'s convertibles took another leg lower in active trade Friday after Moody's Investors Service placed the vodka maker under review for a possible downgrade. The convertibles' 5- to 6 point-drop followed a 2- or 3-point fall on Tuesday to the low 90s on a weaker outlook and waived debt covenants.

The convertible bond primary market, which has been smoldering so far this year, finally caught fire this past week with $4.65 billion in new issuance - the biggest single week since mid November when $4.7 billion in new issues priced, including General Motors Co.'s $4.25 billion of mandatory preferreds, according to Prospect News data.

The week's second biggest new issue drifted lower in trade on Friday. Old Republic International Corp.'s 3.75% convertibles were down in the 99 context after mostly straddling the par line on their debut.

MetLife Inc.'s $3.3 billion proceeds of 5% mandatories, which also debuted on Thursday, were lower in line with their underlying shares at 84.77 versus a share price of $44.85, compared to at 85.25 bid, 85.35 offered versus a $45.25 stock price on Thursday.

The MetLife paper has a delta of about 71%, according to a New York-based sellside desk analyst.

Amylin Pharmaceuticals Inc.'s 3% convertibles traded at 87.5 outright with its shares mostly steady after a freefall on Thursday on unfavorable drug study results reported by the San Diego-based drug discovery company.

NorthStar slightly higher

NorthStar's 7.5% convertibles were trading at 100 bid, 100.5 offered late in the session, following earlier trades as high as 101.25, for a 101 bid, to 101.5 offered market.

Trades had been steady "all day" in that range, a syndicate source said, with the stock doing nothing to speak of.

"The stock has not done much today. It was as low as 42 and as high as 45; so, the stock has done nothing," the sources said, referring to shares of the New York-based real estate investment trust trading between $5.42 and $5.45.

At the close, the shares were down 3 cents, or 0.6%, at $5.43.

The new convertibles were "slightly better," the syndicate source said.

Based on a credit spread of 750 basis points over Libor and using a 30% volatility rate, the new convertible was fair value at around 103.5, according to a source, citing the underwriters' inputs.

A Connecticut-based sellside analyst said he was using a significantly higher credit spread of 1,680 bps, which was implied, and capping vol. at 45%.

That kind of spread indicates something close to bankruptcy and wasn't deemed a fair input by several sources asked.

The Connecticut-based sellsider said that vol. should be capped at 45%, but if 30% vol. was used that would imply a credit spread of 1,183 bps.

"Using the L+750 [bps] assumption, I see fair value around 106," the sellsider said.

Borrow was difficult, but even so the $100 million offering was upsized to $150 million.

It has a hefty 7.5% coupon, with one sellsider pointing out that as the stock yields 7.37%, a high 7.5% bond coupon was necessary.

The paper priced on the cheap end of talk, which was 7% to 7.5% with an initial conversion premium of 18% to 22%.

The issue was sold via joint bookrunners JMP Securities LLC and Citigroup Global Markets Inc., with FBR Capital Markets as a co-manager.

The notes are non-callable for five years with puts in years five, 10 and 15.

Proceeds are earmarked to purchase or repay debt and for general corporate purposes.

New York-based NorthStar is a real estate investment trust that originates and invests in commercial real estate debt, real estate securities and net lease properties.

Old Republic drifts lower

Old Republic's 3.75% convertible senior notes traded at 99.625 versus a share price of $11.98 on Thursday, which compared to 99.75 bid, 100.25 offered at the close versus a share price of $11.99.

"The stock was down a little bit earlier today," a sellsider said. The paper had yesterday traded at 100 versus a share price of $12.10, he said.

"It drifted down very slightly," he said.

By the end of the session, shares of the Chicago-based insurance company ticked back up to positive 10 cents, or 0.8%, at $12.07.

Standard & Poor's said that it assigned a BBB+ rating to the new $500 million of convertibles. The issue does not affect the BBB+ counterparty credit rating or negative outlook, the agency said.

The negative outlook reflects the weaknesses in the economic environment and the effects on the operating groups as well as the potential for an economic relapse, the agency said.

Proceeds are expected to total $539 million with the exercise of the over-allotment. The company will use proceeds to repay some of the debt assumed through the merger with PMA Capital in 2010 and for general corporate purposes, including making additional capital contributions to the insurance company subsidiaries as necessary.

Central European weakens

Central European Distribution's 3% convertibles due 2013 were seen at 83.375 Friday, which was down 5.675 points, according to Trace data.

Shares of the Polish company, with U.S. headquarters in Pennsylvania, fell on the Moody's news by about 10% in active trade. Later they were down only $1.17, or 8.5%, at $12.76.

On Tuesday, the convertibles traded right around 93, which was down from about 95 previously.

The convertibles trade mostly outright.

Moody's placed the vodka maker under review for a possible downgrade in response to deterioration in Central European's operating performances during the fourth quarter of 2010 and early first quarter and word that its lenders have agreed to waive a breach of debt covenants.

The Vodka producer and distributor also posted an unexpectedly weak 2011 outlook.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Central European Distribution Corp. Nasdaq: CEDC

MetLife Inc. NYSE: MET

NorthStar Realty Finance Corp. NYSE: NRF

Old Republic International Corp. NYSE: ORI

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