Existing Tesla 'comes in' on hedge, with all eyes on new Tesla deal; new UTi deal gains

By Rebecca Melvin

New York, Feb. 27 - Tesla Motors Inc.'s existing 1.5% convertibles slipped on an outright basis and came in on a dollar-neutral, or hedged, basis on Thursday on the heels of the launch of the new Tesla convertibles deal that was expected to price after the market close.

The existing Tesla convertibles came in about 0.25 point to 0.5 point on a hedged basis, market sources said.

Meanwhile the new Tesla deal that launched late Wednesday for pricing after the market close Thursday was said to be upsized, with the longer-dated, seven-year tranche getting the additional notes. Also it was expected to price at the rich end of talked terms, a market source said.

UTi Worldwide Inc.'s newly priced 4.5% convertibles traded up to around 104 bid, 104.5 offered by the market close Thursday after the Virgin Islands-based ocean freight and logistics company priced $350 million of the five-year convertibles at the tight end of talk, a syndicate source said.

Market players were more focused on the planned Tesla deal than anything else, however, sources said.

"There was a little pre-market noise in the Street, and after that, nothing," a New York-based trader said regarding the new UTi convertibles.

"People seem excited for Tesla," he said.

Elsewhere, there were quite a few convertibles issuers that were slated to report earnings on Thursday. Early in the day, HeartWare International Inc. reported fourth-quarter results that missed estimates. Campus Crest Communities Inc. announced earnings and forward guidance that sent the underlying shares of the Charlotte, N.C.-based student housing properties company lower by 10%. The Campus Crest earnings report was followed by a downgrade to "neutral" from "outperform" at RW Baird.

But Iridium Communications Inc. shares gained 9.4% despite an earnings miss while revenues were in line with expectations.

Details on convertible bond action in these names was not immediately available.

Also in news Thursday, NorthStar Realty Finance Corp. announced that it is commencing an exchange offer for its 7.5% exchangeable senior notes due 2031, which priced in 2011 and are well in the money.

Under the exchange offer, holders who exchange will get 102% of newly issued 3% senior notes of the company that will mature Sept. 30, 2014.

Equities threw off early weakness to end solidly higher following mixed economic data and comments by new Federal Reserve chairman Janet Yellen on Capitol Hill.

Yellen told a Senate committee that recent weak economic data may not have been driven by winter weather but that the economy was beginning to recover.

Durable goods orders fell a seasonally adjusted 1% in January from a month earlier, the Commerce Department said. Orders fell 5.3% in December. But stripping out volatile aircraft orders, durable goods orders rose 1.7%.

Meanwhile initial claims for jobless benefits increased by 14,000 to a seasonally adjusted 348,000 in the week ended Feb. 22 from the previous week's downwardly revised figure of 334,000, the Labor Department said Thursday. Economists had expected claims would come down to 335,000.

Existing Tesla comes in

Tesla's 1.5% convertibles due 2018 traded extremely actively and fell about 4 points on an outright basis to 210 bid, 210.5 offered. The pullback was small compared to recent gains that have been notched in tandem with a rally in the underlying shares of the electric car maker.

On a dollar-neutral, or hedged, basis the existing Tesla convertibles came in 0.25 point to 0.5 point, a Chicago-based trader said.

"I would have thought they'd be down more," a New York-based trader said about the contraction.

Tesla shares ended the session down 45 cents, or 0.2%, to $252.54, which is up 16% this week.

Tesla's existing 1.5% convertibles slipped in early trade to as low as 207 and were seen at 210 late in the session, which was down from about 214 on Wednesday, according to Trace data. These bonds have been on a tear lately in tandem with the underlying shares of the Palo Alto, Calif.-based electric car marker.

The company was expected to price more than $1.6 billion of convertible senior notes in two tranches after the market close. The two tranches were initially $800 million of notes each, but sources said the tranche of longer-dated, seven-year notes had been upsized and both tranches were pricing at the rich end of talk.

The tranche of five-year notes was seen pricing with a 0.25% to 0.75% coupon, and the tranche of seven-year notes was seen pricing with a 1.25% to 1.75% coupon.

Both tranches will have an initial conversion premium of 37.5% to 42.5% and will have over-allotment options for up to an additional $120 million of notes each.

Goldman Sachs & Co., Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Deutsche Bank Securities Inc. were the joint bookrunners of the registered deal.

UTi Worldwide trades up

UTi's newly priced 4.5% convertibles due 2019 ended the session at 104 bid, 104.5 offered with the underlying shares up 2 pennies at $10.76. They traded primarily on an outright basis.

Early in the session the new notes had "settled in around 103," a syndicate source said.

"They traded outright all day, but they will trade on a hedged basis eventually," a New York-based trader said.

The bonds priced on the rich end of talked terms and outperformed the valuation estimates of some, who said that based on a credit spread of 750 basis points over Libor and 25% vol., the new UTi convertibles looked 1.8% cheap at the midpoint of talk.

The price talk was for a 4.5% to 5% coupon and a 30% to 35% initial conversion premium.

The Rule 144A deal has a $50 million greenshoe and was sold via Citigroup Global Markets Inc. and Morgan Stanley.

Concurrently with the notes, UTi is selling 175,000 convertible preference shares to an investor in a private placement.

UTi expects to pay dividends in kind on the convertible preference shares. Based on the initial conversion price for the preference shares of $13.8671 per ordinary share, and assuming all dividends are paid in kind, UTi expects to issue 15,534,575 ordinary shares if the preference shares remain outstanding through March 1, 2017 and are converted in full.

Until March 1, 2017, holders of the convertible preference shares will have pre-emptive rights with respect to the issuer's equity securities for so long as they own a number of convertible preference shares convertible into at least 6,309,896 ordinary shares and will own about 20.4% of the ordinary shares on an as-converted basis.

Closing of the notes and preference shares are conditional upon each other.

Proceeds will be used for general corporate purposes, including repayment of debt.

The notes are non-callable and have takeover protection. They will also have net share settlement, pending shareholder approval.

UTi Worldwide is an ocean freight and logistics company based in Road Town, the British Virgin Islands.

Mentioned in this article:

Campus Crest Communities Inc. NYSE: CCG

HeartWare International Inc. Nasdaq: HTWR

Iridium Communications Inc. Nasdaq: IRDM

NorthStar Realty Finance Corp. NYSE: NFR

Tesla Motors Inc. Nasdaq: TSLA

UTi Worldwide Inc. Nasdaq: UTIW

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