Kinder Morgan mandatory trades lower on debut, Endologix shares plunge ahead of pricing

By Rebecca Melvin

New York, Oct. 27 – Kinder Morgan, Inc.’s newly priced 9.75% mandatory convertible preferred stock moved lower in active trading on its debut in the secondary market on Tuesday after the $1.57 billion deal priced at the cheap end of talked terms.

The Kinder mandatory traded down to about $48.00 from its $49.00 issue price, and was called a point lower on swap, as shares slipped.

Trading in Kinder Morgan was “very heavy, very sloppy,” a New York-based trader said.

Strikes against the deal included the fact that Kinder Morgan was a very large new issue and that it is in the energy sector, which was also weak amid lower crude and natural gas prices.

In addition, other energy-related mandatories pricing this year such as those of Southwestern Energy Co. and WPX Energy Inc. have come at cheaper pricing, the trader said.

Meanwhile, Kinder Morgan was the first significant new deal to hit the convertible market in more than a month, which made its weak but active debut that much more palpable for the market, the trader said.

Elsewhere in the primary market, Endologix Inc. was eyed as shares of the Irvine, Calif.-based developer of aortic disorder treatments plunged ahead of final terms for the convertible expected to be set after the market close.

A syndicate source said Endologix was still expected to price the $150 million deal of three-year convertible senior notes despite the 36% share slide.

Endologix’s existing 2.25% convertibles due 2020, of which $86.25 million priced at the end of 2013, dropped sharply on Tuesday to about 83.25 bid, 84.25 offered versus an underlying share price of $8.77, compared to 92.25 bid, 94.25 offered versus an underlying share price of $13.73 previously, a trader said.

Endologix launched the new deal at the same time that it reported earnings and announced an agreement to acquire competitor TriVascular Technologies Inc. for about $211 million in stock and cash.

In trading Tuesday, TriVascular shares moved in the opposite direction to Endologix’, surging 36% to $8.77. But they were still below the transaction value of $9.10 per share.

Back in established issues, Yahoo! Inc.’s 0% convertibles were seen adding about 0.5 point on swap after Alibaba Group Holding Ltd., of which Yahoo holds a 15% stake, reported positive earnings.

Ctrip.com International Ltd. continued to be a feature of trade. On Monday, the Chinese internet travel company announced a share swap partnership with Qunar Cayman Islands Ltd. Ctrip stock and the convertibles surged on the news. But on Tuesday Ctrip shares slipped back $2.15, or 2.4%, to $88.63, and the Ctrip 1.99% convertibles, or the D convertibles, which expanded 3 points on Monday, were a bit lower by a couple of points on an outright basis at 110.

The Ctrip 1.25% convertibles, which surged 15 points on Monday to 132, slipped back about 5 points on an outright basis to 127.

New Kinder Morgan drops

Kinder Morgan’s new 9.75% mandatory convertible preferred shares were seen trading down to about $48.00 on their debut, which was off a point on an outright basis, and also down about a point on swap, a New York-based trader said.

Kinder Morgan common shares closed down 28 cents, or 1%, at $27.28.

The weak trade – which accounted was a good chunk of Tuesday’s action – was a sore point for the market.

“It’s not been a good day, especially for the guys who bought a lot of this, $50 million, $70 million or $100 million,” a trader said.

Weakness in the energy sector was a drag. West Texas Intermediate crude oil was down another 1% on Tuesday to $43.40 per barrel.

“It’s a really tough sector and it’s not coming particularly cheap,” a trader said, adding that while Kinder Morgan is more of an energy transportation company it is still affected by the general energy sector and oil and natural gas prices.

Furthermore, the deal has “tough comparables,” he said. “WPX and Southwest are cheaper and traded cheaper even right after the primary.”

“Forty-nine to 48 has not been a particularly good showing by any stretch, especially by the first deal back,” he said.

Kinder Morgan priced the registered deal at the fixed dividend that was talked during marketing and at the cheap end of 17.5% to 22.5% premium talk and at the low end of $49 or $50 talked for the price.

Houston-based Kinder Morgan, an energy pipeline company, also reported earnings that missed estimates.

Endologix on tap

Endologix shares plunged at the open Tuesday and settled 36% lower on the day.

At one point the shares had been down by 40%. The drop came after news of the convertibles deal, the company’s earnings announcement and an acquisition announcement.

A trader said that he thought the stock drop was caused by a combination of the deal news and acquisition news.

“It’s a tough environment, and it announced an aggressive acquisition and an aggressive deal,” the trader said.

When medical device maker Heartware International Inc. announced an acquisition on Sept. 1, its shares dropped to $64.82 from $81.81, and on Tuesday the Heartware shares were at $42.36, the trader pointed out.

Heartware is not a direct competitor of Endologix, but it illustrates the headwinds that the sector has been facing, the trader said.

Endologix reaffirmed revenue guidance for 2015 but warned the merger with TriVascular may result in some temporary disruption to its business. For 2016 it expects to issue guidance in conjunction with the fourth quarter call which will be in February.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Endologix Inc. Nasdaq: ELGX

Kinder Morgan Inc. NYSE: KMI

Yahoo! Inc. Nasdaq: YHOO

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