Convertibles muted, but volatility could be ahead; Colony Starwood launches year’s first deal

By Stephanie N. Rotondo

Seattle, Jan. 3 – Convertible bond market players were biding their time as 2017 started, with many opting to get their bearings before jumping into trading.

“It’s slower than Friday [before New Year’s],” a trader said. “People must be marking their books or something.”

Still, once the market got settled, the trader said he expected the primary space to churn out deals, especially given that December was on the livelier side.

“The prospect of higher rates is good for converts because that means guys will issue [ahead of any increases],” the trader said.

The trader also noted that the market was “waiting for the market to rollover too, so that will help.”

To kick off the year, Colony Starwood Homes announced a $250 million offering of five-year convertible senior notes at the end of the day.

Pricing is expected after Wednesday’s close, with price talk set in a range of 3.25% to 3.75% and a conversion premium of 20% to 25%.

The Rule 144A deal is being led by Morgan Stanley & Co. LLC.

There will be a $37.5 million greenshoe.

The notes are not putable, save for certain circumstances, such as a fundamental change. The convertibles can only be called if the company needs to do so in order to preserve its real estate investment trust status.

Colony’s stock ended the day at $28.92, up 11 cents.

Colony is based in Scottsdale, Ariz.

Delek buying Alon

It was announced on Tuesday that Alon USA Energy Inc. was being bought by Delek U.S. Holdings Inc. for $464 million in an all-equity deal.

Delek already owned about 47% of the company.

A trader said the all-stock offer was “a big positive for convertibles guys when the bond is in the money.”

However, the trader added that the 3% convertible notes due 2018 hadn’t traded much, though he opined the issue should be in a 109.5 to 110 context versus the $12.50 stock price.

The trader later saw the issue trade at 109.184 versus $12.33. Another market source pegged the paper at 109.25, a gain of over 3 points outright.

The underlying equity traded up $1.26, or 11.07%, to $12.64.

Delek is offering 0.504 shares for each whole Alon share. That equates to about $12.13 per share.

The combined company is expected to achieve cost savings of $85 million to $105 million. The deal is also expected to improve earnings per share in 2018.

Additionally, Delek is assuming $152 million of Alon’s debt and will also pay $59 million for a non-controlling interest in Alon USA Partners LP, which owns and operates a refinery in Big Spring, Texas.

The merger is expected to close in the first half of 2017.

Paladin on the brink

Paladin Energy Ltd.’s convertibles got a boost on Tuesday as it was reported that the uranium producer could be forced into bankruptcy.

A market source placed the 7% convertible senior unsecured notes due 2020 at 55, a gain of 7 points outright. The 6% convertible senior notes coming due April 30 were up 5 points at 59.

The Toronto-listed stock was stead at C$0.09.

Paladin has been struggling as uranium prices have stalled. With $212 million of the 6% convertibles coming due this year and another $20 million in interest payments, the company’s paltry $27.6 million of cash on hand won’t be enough to weather the storm.

Still, Paladin has made an effort, attempting to sell non-core assets, as well as stakes in certain projects. But that has hit a snag as well, as Electricité de France now wants more collateral for the $200 million prepayment it gave the company on a contract that spans until 2024.

DepoMed firms

DepoMed Inc.’s 2.5% convertible senior notes due 2021 jumped in Tuesday trading after it was reported that KKR & Co. LP was considering purchasing the specialty pharmaceutical company.

The convertibles were seen straddling 121, a gain of over 8 points outright.

The equity meantime popped $2.32, or 12.87%, to $20.34.

According to reports, KKR wants to combine DepoMed with its own Arbor Pharmaceuticals. Analysts are estimating that KKR might pay up to $25 per share for the company.

However, KKR might also have some competition in Daichi Sankyo, which is also considering making a bid.

Bids are due Wednesday.

Mentioned in this article:

Alon USA Energy Inc. NYSE: ALJ

Colony Starwood Homes NYSE: SFR

DepoMed Inc. Nasdaq: DEPO

Paladin Energy Ltd. TSX: PDN

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