Downsized Starwood edges up from discount; Salix flat to lower; Red Hat extends gains

By Rebecca Melvin

New York, Oct. 3 – Starwood Property Trust, Inc.’s newly priced 3.75% convertibles traded up from their discounted reoffered price Friday but were still below par after the Greenwich, Conn.-based commercial and real estate finance company priced a reduced version of a planned dual-tranche deal launched Thursday.

The new Starwood convertibles due 2017 were trading at 99.5 around midmorning with the underlying shares higher by about 1%, a New York-based trader said.

Starwood priced $375 million of the three-year notes and skipped a second tranche of five-year notes that were talked for a combined $500 million deal.

Starwood’s existing 4% convertibles due 2019 traded a 106.79 early Friday, according to Trace data. That was up from lows notched Thursday at around 104.7 but below 109 where it was trading before the deal was announced.

Elsewhere, Salix Pharmaceuticals Ltd.’s 1.5% convertibles were essentially flat after news that the Raleigh, N.C.-based drug company scuttled a planned merger with Italy’s Cosmo Pharmaceuticals SpA following new Treasury Department rules aimed at cracking down on so-called inversion deals.

Under the Cosmo merger, Salix planned to take advantage of lower overseas corporate tax rates by moving its domicile abroad.

Salix shares rose on the news. Granted Salix has other irons in the fire, but this week brought reports that Allergan Inc. was stepping away from a possible link up with the drug company. There is another player in the mix, however, namely Actavis plc, and “the question is what happens ultimately with ACT,” a trader said.

Back in established issues, Mylan Inc.’s 3.75% convertibles were bid higher by 0.25 point amid merger speculation for that drug maker based in Canonsburg, Pa.

Red Hat Inc.’s 0.25% convertibles, which debuted in the market Thursday, traded higher at 103.3 versus a share price of $59.06 during the session, a New York-based trader said. Toward the end of the day it was quoted at 102.25 with shares at about $58.50.

The paper was up 0.5 point dollar neutral from issue, assuming a 55% delta, a syndicate source said.

The BBB rating on this security worked really well especially for long-only players in Europe and the United States, a sources said.

In the broader markets, equities bounced higher, encouraged by the September jobs report, which showed U.S. nonfarm payrolls grew at a better-than-expected 248,000 jobs, helping pull the U.S. unemployment rate down to 5.9%, the Labor Department said.

Economists had expected payrolls to rise to 215,000 for the month and the unemployment rate to stick at 6.1%.

In addition, the report’s revisions to the summer months were to the upside. In August, 180,000 jobs were added instead of the initially reported 142,000 positions, and July saw the creation of 243,000 jobs, up from an initial estimate of 212,000.

Starwood up, still below par

Starwood’s new 3.75% convertibles traded around 99.5 in the early going against shares that were up 1%, a New York-based trader said.

They also traded at 99.375 after having priced at 98.75.

Starwood shares ended higher by 22 cents, or 1%, at $22.00.

The deal’s downsizing and reoffer point to the original terms being unattractive.

Pricing for the 2017 notes, which have a greenshoe for $56.25 million, came at the cheap end of talk for a 3.25% to 3.75% coupon and 10% to 15% premium.

The 2019 notes had been talked at a 4% to 4.5% coupon and 10% to 15% premium.

“At a 100 issue price, it was very unattractive especially with the convertibles universe repricing lower in September,” a New York-based trader said.

A second source said that the three-year tranche was able to get done due to its shorter duration. “No one wants to extend in this market,” the New York-based sellsider said.

A third source said that the Starwood convertible was a different kind of a security than normal with a bond floor in the high 90s, and therefore attractive to a different set of investors from the norm in the convertibles market.

“If you buy this bond you give up more than half the yield – the stock yield is 8.71% – and the first 10% of premium, but get the bond floor,” the market source said.

The more specialist-type investor is likely involved in mortgage related finance and mortgage real estate investment trusts.

Starwood priced $375 million of the three-year convertible senior notes at a discount to par of 98.75 and with a 10% initial conversion premium.

The registered deal was downsized from original talk for a $500 million offering of two series of convertibles, maturing on Oct. 15, 2017 and Oct. 15, 2019.

Citigroup Global Markets Inc., Morgan Stanley & Co. LLC, Deutsche Bank Securities Inc. and Wells Fargo Securities LLC were joint bookrunners of the deal.

Proceeds will be used to originate and purchase additional commercial mortgage loans and other target assets and investments. Proceeds also may be used for other general corporate purposes, including the payment of liabilities and other working capital needs.

Starwood is a Greenwich, Conn.-based commercial real estate finance company.

Salix flattish to lower

The Salix bonds were quoted at 239.50 bid, 240.25 offered with the stock at $154.85.

The stock pared early gains, ending higher by $1.78, or 1.2%, at $152.87.

Prior to the news, the convertibles were 240 to 242.

“Initially, the stock was up 10 points on the news, you would think the stock would be down on the news,” a trader said.

“The bonds traded on the bid side; they didn’t come in. But they haven’t moved much and are maybe a little weaker,” the trader said.

“There’s a lot of moving parts. It’s hard to say what’s happening in the balance,” the trader added.

Mentioned in this article:

Mylan Inc. NYSE: MYL

Red Hat Inc. NYSE: RHT

Salix Pharmaceuticals Inc. Nasdaq: SLXP

Starwood Property Trust Inc. Nasdaq: STWD

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