New Standard Pacific adds on debut; Knight Capital 'squashed' after glitch roils markets

By Rebecca Melvin

New York, Aug. 1 - Standard Pacific Corp.'s newly priced 1.25% convertibles traded up surprisingly well on their debut in the secondary market early Wednesday. But after an advance of 2 points or more, the new convertibles lost some steam later with weaker shares, ending the session at 101.625, according to market sources.

The Irvine, Calif.-based homebuilder priced the upsized $220 million of 20-year convertibles at the midpoint of revised talk, and the higher pricing was attributed to demand from outright investors, who are hungry for new paper amid very constrained supply.

In fact, the Standard Pacific convertible was the first new paper to hit the U.S. convertible bond market in about three weeks.

Knight Capital Group Inc. was another name in focus in the convertible market Wednesday - and in the broader markets, for that matter - after Knight Capital orders in about 150 New York Stock Exchange-listed stocks ran amok due to what the electronic trading firm described as a software glitch that affected routing.

The Knight Capital convertibles were "squashed," an East Coast-based portfolio manager commented, along with the underlying shares of the firm.

Some Knight Capital convertibles looked to have traded at low as 82.75, which was down from 92.5 Monday, the portfolio manager said.

Symantec Corp. was a little higher in active trade, moving with improving shares amid speculation that the Mountain View, Calif.-based security software company could split up its security software and storage businesses following a move last week to oust the sitting chief executive in favor of chairman Steve Bennett.

Secondary market action overall was quiet. There was "not a ton else trading out there" in convertibles, a New York-based trader said.

In the broader markets, equities ended slightly lower after being buffeted by the Knight Capital debacle in the morning and news of the Federal Open Market Committee standing pat on policy in the afternoon.

The FOMC left its target range for the Federal Funds rate unchanged and said it is not taking any additional accommodation measures right now.

However, the committee said it will "closely monitor" the economy for signals that additional easing is warranted.

The housing sector remains depressed, and inflation is suppressed, the FOMC said, and it continues to anticipate economic conditions are likely to warrant exceptionally low rates until at least 2014.

Also in the headlines was word that Moore Capital Management's Louis Moore Bacon plans to return $2 billion of investors' money, or 25% of his main hedge fund, saying it's too large to achieve past returns given "liquidity and opportunities have become more constrained."

The hedge fund manager blamed among other things low interest rates, Europe and the Obama Administration's posture toward business.

Standard Pacific adds

In early trading, Standard Pacific's 1.25% convertibles due 2032 looked like a surprise to the upside. The new paper was quoted up at 102.5 bid, 102.75 offered around midsession, but at the end of the day, it was lower at 101.625, sources said.

Shares slipped at the end of the day as well, ending down 1% at $5.61. The shares traded very actively during the session.

Syndicate sources would not comment on initial dealings or pricing of the new convertibles.

Many convertible arbitrage players weren't overly enthusiastic about the Standard Pacific convertibles before pricing, and the deal's success was attributed to outright investors starved for new issuance.

"We think outright accounts are buying this one and moving the price up," a New York-based trader said.

A second source concurred that lack of paper was a big factor. The relatively small, $220 million deal was considered meaty considering recent fare in the market.

Initially, the deal was going to be $150 million in size but was upsized during marketing to $200 million, before ultimately pricing at $220 million in size.

Another factor may have been that the housing sector has been seen as a fairly good investment in the past few weeks, s source said.

Standard Pacific priced the deal at the midpoint of revised talk for the coupon and at the upper end of initial conversion premium talk for a 42.5% premium.

The original talk on terms was for a 1.125% to 1.625% coupon and a 37.5% to 42.5% premium.

The registered deal has an over-allotment option for the underwriters to purchase up to an additional $33 million - up from $22.5 million - of notes.

Standard Pacific also priced an offer of 12.5 million shares of its common stock at $5.67 apiece, with an option for underwriters to purchase up to an additional 1,875,000 common shares.

J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Bank of America Merrill Lynch are the joint bookrunners of both offerings.

The convertible notes are non-callable until Aug. 5, 2017, with put dates in years five, 10 and 15. Upon conversion, the notes will be settled with shares.

The notes are convertible into shares at an initial conversion rate of 123.7662 shares per $1,000 principal amount of notes, equal to a conversion price of $8.08 per share.

There is a change-of-control make whole and anti-dilution adjustments and dividend protection.

Proceeds will be used for general corporate purposes, including land acquisition and development, home construction, and other related purposes.

Knight Capital shellacked

Knight Capital's 3.5% convertibles due 2015, of which $375 million were priced in March 2010, were pummeled on Wednesday, falling to 82.5 bid, 84 offered from about 92.5 previously.

Knight Capital shares fell $3.39, or 33%, to $6.94.

The shares ended on their lows, having been down earlier in the session by only 26%.

Prices in numerous stocks fluctuated widely during the first 45 minutes of trading Wednesday, and market participants said an algorithm-based order had overwhelmed the market. The source of the glitch was Knight Capital, a provider of market-access and trade-execution, which said there were delays in processing orders, and clients were advised to execute trades elsewhere for the time being.

Not a lot of the Knight Capital convertibles traded, a portfolio manager said, and whether the convert can spring back or from the drop was debatable.

"That's a tough call," a New York-based trader said.

A second trader, this one in Connecticut, said "it could stick or sink."

A third trader said that he expected that the bonds should rebound.

The trading software glitch caused increased stock trading volume, which was above $1 billion shares traded by 1:30 p.m. ET, which is higher than the typical $700 million to $800 million volume pace that has been tallied of late.

Mentioned in this article:

Knight Capital Group Inc. NYSE: KCG

Standard Pacific Corp. NYSE: SPF

Symantec Corp. Nasdaq: SYMC

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