Morning Commentary: Market eyes Redwood Trust; QTS convertible preferreds on tap

By Abigail W. Adams

Portland, Me., June 20 – While the fast and furious pace of new deal activity in the convertible space is expected to slow in the final weeks of June, it has not stopped, with two deals from real estate investment trusts in the works.

Redwood Trust Inc. plans to price $200 million of six-year convertible notes after the market close on Wednesday with price talk for a coupon of 5.125% to 5.625% and an initial conversion premium of 6% to 10%, according to a market source.

Sources pegged the deal from the repeat issuer of convertible notes between 0.5 point rich to 1 point cheap.

QTS Realty Trust Inc. plans to price $225 million, or 2.25 million shares, of par of $100 series B perpetual cumulative convertible preferred stock after the market close Wednesday with price talk for a dividend of 6% to 6.5% and an initial conversion premium of 20% to 25%, according to a market source.

Deutsche Bank Securities Inc., Jefferies & Co. and Morgan Stanley & Co. LLC are joint bookrunners for the registered offering, which carries a greenshoe of $33.75 million.

The deal preliminarily looks several points cheap, a market source said.

Redwood in focus

Redwood’s new $200 million offering of six-year convertible notes “doesn’t scream cheap,” a market source said.

Underwriters are marketing the deal with a credit spread of 400 basis points over Libor and a 15% vol., according to a market source. The deal models about 0.55 point rich at the midpoint of talk, a market source said.

However, the deal modeled about 1 point cheap if pricing came toward the cheap end of coupon talk and the rich end of talk for an initial conversion premium, assuming the current 30 cent dividend and a 30 bps borrow on common stock, another source said.

With a higher vol., the deal modeled “a little cheap” and seemed to come right on top of Redwood’s 4.75% convertible notes due 2023, another source said.

Sources took note of the price talk for the conversion premium. “This is the first premium I’m seeing below 10%,” a source said.

Redwood is a repeat issuer of convertible notes. The company’s 4.75% convertible notes were last seen trading at 98.897 on Monday. The company’s 5.625% convertible notes due 2019 last traded at 103.25 on June 14, according to Trace data.

QTS eyed

QTS Realty’s $225 million offering of series B perpetual cumulative convertible preferred stock modeled several points cheap at first glance, a market source said.

Underwriters are marketing the deal with a credit spread of 450 bps over Libor and a 22% vol., which models almost 8.5 points cheap, the source said.

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