BlackRock Kelso flat; planned Cliffs wrestles borrow; Starwood up; WellPoint flat to lower

By Rebecca Melvin

New York, Feb. 13 - BlackRock Kelso Capital Corp.'s newly priced 5.5% convertible senior notes traded more or less flat on their debut in the secondary market Wednesday after pricing beyond the cheap end of coupon talk ahead of the market open.

Trading was not very active and in the area of par, sources said.

Market players were eyeing Cliffs Natural Resources Inc.'s planned $500 million of class A mandatory convertibles, but given limited borrow, it wasn't getting much play in the gray market.

There was a gray in the area of 25.10 to 25.30, but borrow costs, which seemed to increase during the session, were hampering the deal from the hedged players' perspective.

Starwood Property Trust Inc.'s 4.55% convertibles - an upsized $525 million deal that debuted Tuesday - extended gains and were seen about 2.25 points improved on a dollar-neutral basis, using about a 30% delta, a New York-based analyst said.

Overall, the convert market was seen as "generally soft," a Connecticut-based trader said.

But given the new paper, which is coming in encouragingly chunkier sizes, it wasn't surprising to see some softening in the space.

"The whole too-dear-to-sell theory goes out the window," a New York-based trader said.

WellPoint Inc. was flat to a little weaker on a dollar-neutral basis, with the underlying shares of the Indianapolis-based health benefits company down 4.6%.

The WellPoint 2.75% convertibles due 2042, of which there is $1.5 billion outstanding from the deal that priced in October, was seen at 107.5 bid, 108 offered versus an underlying share price of $63.00 near the end of the session, a Connecticut-based trader said.

But Level 3 Communications Inc.'s 7% convertibles due 2015 recovered some ground Wednesday after an ugly day Tuesday on disappointing earnings. The Level 3 7% convertibles were seen better by 1.5 points to 2 points on hedged basis on Wednesday after weakening about a point on Tuesday.

"So call it plus 0.5 point to plus 1 point over the two days," a New York-based trader said.

BlackRock Kelso flat on debut

BlackRock Kelso's newly priced 5.5% convertibles due 2018 traded multiple times at par on their debut Wednesday, and they were seen wrapped around par, or at 99.75 bid, 100.25 offered in early afternoon trading.

BlackRock Kelso shares ended down a penny at $10.55 in fairly active trade.

BlackRock priced $100 million of the five-year convertible senior notes through the cheap end of talk on the coupon, which was talked at 4.625% to 5.125%, and at the cheap end of 10% to 15% premium talk.

There is a $15 million over-allotment option.

Citigroup Global Markets Inc. and BMO Capital Markets were the active bookrunners. Passive bookrunners were BofA Merrill Lynch, Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc.

The notes are non-callable for life and will not be putable. They are expected to be rated BBB- by Standard & Poor's and Fitch.

Proceeds will be used to repay outstanding borrowings under a credit facility and for general corporate purposes.

BlackRock Kelso (Nasdaq: BKCC) is an externally managed business development company based in New York.

Cliffs wrestles borrow

Cliffs Natural Resources' planned preferred stock deal, which was seen pricing after the market close Thursday, definitely had a wet blanket thrown on it due to limited and expensive borrow.

The borrow cost was a 2% drag on the deal in the early going, and one source said the cost had gone to 3% to 4% by the end of the day.

The New York-based trader thought that the borrow issue was going to get worse before it got better, and given that the structure of the deal is a mandatory, the borrow issue pretty much outweighed other factors.

"The borrow is an issue, and people are spending a lot of time looking at that, more so than what the model is," the trader said.

Cliffs Natural planned to price the planned $500 million of class A mandatory convertibles with a dividend of 6.75% to 7.25% and an initial conversion premium of 17.5% to 22.5%.

At the midpoint of talk, the deal modeled about 1% cheap, and a gray market was heard in the 25.10 to 25.30 range.

Cliffs Natural, which also reported disappointing earnings and cut its dividend at the same time that it announced the concurrent common stock and mandatory preferred offerings, skidded $7.32, or 20%, to $29.29 in heavy volume Wednesday.

The mining company also plans to price 9 million shares of common stock in an add-on offering.

Despite the stock drop, market players weren't seemingly interested in playing the move or hoping for a rebound. "The borrow issue has put a damper on the whole thing," a trader said.

Given that the deal doesn't price until after the market close Thursday, it was too early to determine where the outright convertibles players stood on the deal.

Cliffs, the biggest U.S. iron ore producer, cut its quarterly dividend by 76% to 15 cents per share. It also said it continues to expand its operating scale and geographic presence but has shifted its strategy away from mergers and acquisitions to one that focuses primarily on organic growth and expansion initiatives.

Cliffs also reported a fourth-quarter loss of $1.62 billion, or $11.36 a share, compared with net income of $185.4 million, or $1.30 a share, a year earlier. Excluding a $1 billion write-down of assets and other one-time items, earnings were 62 cents a share, which was better than expected.

The planned $25 par mandatories have a $75 million over-allotment option.

J.P. Morgan Securities LLC and BofA Merrill Lynch are the joint bookrunners. Lead co-managers are Wells Fargo Securities and BMO Capital Markets, with co-managers Credit Agricole CIB, TD Securities, Scotia Capital (USA) Inc. and Mizuho Securities.

The mandatories will automatically convert to common stock on Feb. 15, 2016.

Proceeds will be used to repay borrowings under a term loan facility. Any remaining funds will be used for general corporate purposes.

The Cleveland-based mining and natural resources company intends to list the new issue on the New York Stock Exchange under the symbol "CLV."

Mentioned in this article:

BlackRock Kelso Capital Corp. Nasdaq: BKCC

Cliffs Natural Resources Inc. NYSE: CLF

Starwood Property Trust Inc. NYSE: STWD

WellPoint Inc. NYSE: WLP

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