Starwood new straight debt causes valuation change for convertibles

By Ronda Fears

Nashville, Tenn., April 11 - Starwood Hotels & Resorts Worldwide Inc.'s upsized offering of $1.5 billion of straight debt (Ba1/BBB-) has caused a rethinking of the valuation assumptions on the company's two convertible issues.

Deutsche Bank Securities Inc. said a credit spread of 275 basis points over Libor is now appropriate for the two 0% convertibles due 2021 (Ba1/BBB-). The firm had been using 350 basis points. The stock volatility level of 36% stands pat.

Starwood sold $700 million of 7.375% notes due 2007 at 99.685 to yield 7.45% and $800 million of 7.875% notes due 2012 at 99.483 yield 7.95%.

Price talk on the split-rated Rule 144A deal put the five-year notes pricing to yield 7.375% to 7.5% and the 10-year notes pricing to yield 7.875% to 8.0%.

The new straight debt ranks pari passu to the two convertibles.

Given the new data points, Deutsche analysts said using a credit spread of 275 basis points is now appropriate for the two relatively short-dated zero-coupon convertible obligations. The Starwood #1 convertible, issued at 81.91 in May 2001, is putable in May 2002 at 82.749. The #2 convertible, issued at 52.48 in May 2001, is putable in May 2004 at 57.838.

The Starwood #1 convert is hovering at the put price but the #2 convert was quoted 0.25 point lower at 52.25 bid, 52.75 offered. The underlying stock closed down 29c to $39.26.

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