Convertibles firm; Lennar trades near par; InterOil jumps; SandRidge quiet, shares plunge

By Rebecca Melvin

New York, Nov. 5 - The convertible bond market held gains Friday that were notched Thursday when stocks and bonds rallied in the aftermath of the Federal Open Market Committee's decision to undertake a second round of quantitative easing.

The euphoria died down in the broader markets by Friday, with U.S. Treasuries actually selling off on the heels of better-than-expected jobs data; but the convertibles market remained firm, market sources said.

Lennar Corp.'s upsized $435 million of 10-year convertible notes, priced to yield 2.75% with a 40% initial conversion premium, was actually seen as a supporting factor for secondary market pricing.

"It makes everything else look better when you have something price like that - that's really pushing the envelope," a New York-based sellside trader said, referring to the issue's terms.

Specifically, existing shorter-dated paper was looking good, he said, in contrast to the new Lennar.

The new Lennar 2.75% convertibles traded actively Friday at 100 bid, 100.25 offered versus a share price of $15.81.

Also among new issues was InterOil Corp.'s newly priced 2.75% convertibles due 2015, which traded up at 104, a Connecticut-based sellside trader said. The $61 million issue priced with a 32.5% premium.

SandRidge Energy Inc.'s $250 million of 7% convertible perpetual preferreds, with a $100 par, which priced after the market close Thursday, weren't heard in trade Friday. But SandRidge shares fell sharply, settling down 70 cents, or 12%, at $5.16.

Elsewhere, EMC Corp. was about a point lower in active trade, reversing about a 1.5-point gain on Thursday. Sources said it was unclear why there was so much volume in the name. The shorter-dated EMC 1.75% convertibles due 2011 traded down almost a point to 137.75, and the EMC 1.75% convertibles due 2013 were lower by about the same amount, printing at 144.875.

In addition, United States Steep Corp.'s 4% convertibles due 2014 were active and traded up several points to 168.125 versus a share price of $48.55.

There was an up tick in new issuance for the week, with $1.88 billion in six deals coming to market.

Stanley Black & Decker Inc.'s $550 million of 4.75% convertible preferred units was probably the deal of the week. The New Britain, Conn.-based provider of power tools and related accessories saw its new paper trade up to the 105 area.

Earlier in the week, Developers Diversified Realty Corp. priced $305 million of 1.75% convertible senior notes, and Vishay Intertechnology Inc. priced $275 million of 2.25% convertibles, which were released for secondary dealings on Thursday.

Lennar trades actively

Lennar's newly priced 2.75% convertible senior notes due 2020 traded at 100 bid, 100.25 offered versus a share price of $15.81 late in the session.

Shares of the Miami-based homebuilder settled little changed, or up 4 cents at $15.85.

The Rule 144A deal was significantly upsized to $435 million in size, compared to an initially talked $350 million.

The convertibles are non-callable until Dec. 20, 2015, with a put in year five. There is dividend and takeover protection.

Proceeds are for general corporate purposes, which may include repayment of outstanding debt and potential acquisitions of real estate.

InterOil gains

InterOil's 2.75% convertibles due 2015 traded up to 104. Shares of the energy and exploration company with assets in Papua New Guinea gained $2.64, or 3.5%, to $78.43.

The Cairns, Australia, and the Woodlands, Texas-based E&P company priced $61 million of five-year convertible bonds before the market open Friday, concurrently with an offering of about $183 million of common stock, or 2,434,785 shares at $75.00 each.

The registered offering, which has a $9 million greenshoe, came at the rich end of the 2.75% to 3.25% coupon talk and 22.5% to 27.5% initial conversion premium talk.

Morgan Stanley & Co. was the bookrunner.

Morgan Stanley and Macquarie Capital (USA) Inc. were joint bookrunners of the common stock offering.

The convertibles are provisionally callable for life subject to a price hurdle of 125% over conversion.

Upon conversion, they may be settled in cash, stock or a combination. There is also standard dividend and takeover protection.

InterOil plans to use proceeds for a proposed condensate stripping plant, liquefied natural gas plant and other exploration and development in Papua New Guinea.

SandRidge prices

SandRidge priced $250 million of convertible perpetual preferred stock at par after the market close Thursday with a dividend of 7% and an initial conversion premium of 32.5%.

A New York-based outright buysider said, "I like traditional convertible preferreds, which have been in short supply for many years. The terms on preferreds are usually good, if the dividends can be maintained."

In this case, "it's talked to yield 7% whereas the common has no dividend (and probably won't have one, given that the company burns cash). This convertible could easily outperform the underlying stock whether the stock goes up, down or sideways. All the holder has to do is conclude that the preferred dividend holds. Not everyone can do this, of course," the buysider said.

The Rule 144A deal, which was sold via joint bookrunners Deutsche Bank Securities Inc. and Tudor, Pickering and Holt, has a $50 million greenshoe.

The preferred shares are convertible after five years, at which time SandRidge can force conversion if its shares exceed 130% of conversion.

Proceeds will be used for general corporate purposes, including repaying a portion of its revolving credit facility and to fund capital expenditures.

SandRidge is an Oklahoma City-based oil and gas company.

Mentioned in this article:

Developers Diversified Realty Corp. NYSE: DDR

EMC Corp. NYSE: EMC

Lennar Corp. NYSE: LEN

InterOil Corp. NYSE: IOC

SandRidge Corp. NYSE: SD

Stanley Black & Decker Inc. NYSE: SWK

Vishay Intertechnology Inc. NYSE: VSH

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