Convertibles: ‘Bleeding has slowed’; new Red Hat expands unexpectedly; Starwood on tap

By Rebecca Melvin

New York, Oct. 2 – Convertibles flattened out on Thursday after evidence that the hemorrhaging was beginning to stop late Wednesday, a New York-based trader said.

“Maybe going out last night, it felt like the speed with which things were ‘coming in’ was starting to draw attention. It reached levels where the amount of pain was attracting vulture bids,” the trader said.

On Thursday names that had dropped sharply were trading flat, or in line, with their underlying shares, including Citrix Systems Inc., AOL Inc., Twitter Inc. and Tesla Motors Inc. Those names held at decent levels, he said.

“It flattened out today; there were not a lot of people looking to trade, but it was a better day all around,” the trader said.

Even so, this trader did not think the pain was over. “I don’t think it is over, or that it changes the view that there are hedged funds with liquidity issues. The whole world seems short of cash,” the trader said.

But Thursday was better.

Red Hat Inc.’s newly priced 0.25% convertibles traded a little above par and better on a hedged basis after the Raleigh, N.C.-based software company priced $700 million of the five-year notes at the cheap end of coupon talk and beyond the cheap end of premium talk.

“The fact that they didn’t trade down based on how they looked yesterday was a win. Even flat would have been a victory,” a New York-based trader said.

On Wednesday, the deal traded in the gray market ahead of final terms being fixed around issue price.

Also in the primary market, Starwood Property Trust, Inc. launched a registered offering of $500 million of three- and five-year convertible senior notes.

Starwood’s existing 4% convertibles due 2019 traded at 106.1, according to Trace data.

Back in established issues, Mylan Inc.’s 3.75% convertibles were trading actively amid takeout rumors that were getting uneven response from market players.

One trader said he thought he might have heard the rumors but he didn’t pay any attention.

A second trader said if the speculation turns out to be true, then holders would make 2 points on the bonds under their indenture’s takeout protection provision. That assumes a 40% premium on the takeout offer, he said.

The Mylan 3.75% convertibles due 2015 changed hands at 359.3, according to Trace data. Shares of the Canonsburg, Pa.-based generic drug maker rose $1.23, or 2.7%, to $46.50.

New Red Hat adds

Red Hat’s newly priced 0.25% convertibles due 2019 traded at around par and a little over. Shares of the Raleigh, N.C.-based open-source software provider pulled higher into the close after earlier weakness, ending up 91 cents, or 1.6%, at $57.38.

The deal priced with a 30% initial conversion premium, which was below the 32.5% to 37.5% premium that was talked.

The call spread overlay, with which the deal came, boosts the premium from the issuer’s perspective to 80%, based on the strike on the warrant transactions at $101.646.

The deal also came with an accelerated share repurchase program, or ASR, with Goldman Sachs & Co.

“They spent $375 million on the ASR out of $700 million of proceeds, or $805 million if you count the greenshoe. That’s half a recap and half general corporate purposes,” a syndicate source said.

Goldman is going to execute the ASR over the next couple of months that sets the price where they repurchase as they go.

The bonds are non-callable for life, with no puts. They have standard dividend and takeover protection. They will be settled in cash, stock or a combination of both.

Joint bookrunners were Morgan Stanley & Co. LLC, BofA Merrill Lynch, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Barclays, Goldman Sachs & Co., RBC Capital Markets LLC and Wells Fargo Securities LLC.

Starwood plans deal

Starwood plans to bring a dual-tranche deal for which proceeds will be used to originate and purchase 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. It was last in the market with the $400 million of 4% convertibles that priced in June 2013.

The new notes were talked at a 3.25% to 3.75% coupon for the three-year paper and a 4% to 4.5% coupon for the five-year paper. Both issues were talked at an initial conversion premium of 10% to 15%.

The notes are non-callable and were being sold via joint bookrunner Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Wells Fargo Securities LLC.

Mentioned in this article:

AOL Inc. NYSE: AOL

Citrix Systems Inc. Nasdaq: CTRX

Mylan Inc. NYSE: MYL

Red Hat Inc. NYSE: RHT

Starwood Property Trust Inc. Nasdaq: STWD

Tesla Motors Inc. Nasdaq: TSLA

Twitter Inc. Nasdaq: TWTR

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