Older Starwood Waypoint ‘comes in’ sharply with new deal; planned Dynegy ‘looks fine’

By Rebecca Melvin

New York, Oct. 7 – Convertibles traded weakly on Tuesday as yield names continued to move lower amid a general trend in the space favoring cash and following a couple of issue-specific situations that beat up investors already this week, a New York-based trader said.

Starwood Waypoint Residential Trust’s older 3% convertibles, which priced three months ago, came in 3 points on a dollar-neutral, or hedged, basis on Tuesday on the heels of the real estate investment trust’s new deal of $150 million of three-year convertible notes, which were expected to price after the market close at a 4% to 4.5% coupon and a 20% to 25% premium.

The older Starwood paper has a five-year duration.

“The new deal comes with a shorter maturity but better coupon and lower premium than the existing [notes]. Holders of the existing got screwed by the company doing that,” a Connecticut-based market source said.

Also GT Advanced Technologies Inc.’s convertible bonds remained active after the stock and bonds collapsed on Monday on news that the Merrimack, N.H.-based solar and LED equipment company filed for Chapter 11 bankruptcy protection.

The GT Advanced bonds were seen as low as 29 and were quoted at both 30 bid, 32 offered and at 32 bid, 34 offered range early Tuesday. Later they traded up some more with shares that bounced from less than $1.00. But “the stock is up on nothing,” a New York-based trader said.

The market experienced “a lot of fear from GTAT,” a second New York-based trader said, adding that the bankruptcy was an isolated event and company specific.

Meanwhile, Dynegy Inc. planned to price $400 million of three-year mandatory convertible preferred shares after the market close that looked fine at the midpoint of talk, but unfavorable at the rich end of talked terms, a New York-based trader said.

Independent power producers, of which Dynegy is one, are well represented in the convertibles space.

For example, Exelon Corp. priced a $1.15 billion deal of equity units in June. Those units slipped below par last week but were now above par at about 52, an East Coast-based buysider said. They are looking attractive compared to 56 to 58 where they were last June, he said.

In fact, convertibles in general are beginning to take on a more favorable complexion after weeks of selling that have brought them to a slightly cheaper level.

“We are starting to see some value in the market as prices decline. There are more attractive premiums, and it’s a bit more attractive for outrights; although I am not sure that it’s attractive enough to entice crossover investors,” the buysider said.

Convertibles have been for sale since a bump up in rates and credit spreads sparked concern that this was the tip of the iceberg, the buysider said.

“Convertibles trade on sentiment. The idea that interest rates have to go higher and equities haven’t seen a 10% correction in three years” was the impetus for the pullback.

“But it’s not like the convertibles market has gotten cheap; to give some of that back is not a big surprise,” the buysider said.

Meanwhile, a windfall of new issuance this year that continued through September was a contributing factor to pressure on the secondary market. At the same time, though, paper is coming out of the market, the buysider said, pointing to the MetLife mandatories converting in a few days, Tibco Software Inc., Tower Group International Ltd. and now GT Advanced.

“Until we have a bump up in interest rates, the convertibles market isn’t going to look as attractive as it had eight years ago, but there has been some cheapening,” he said, and that merits selective purchasing. One area he likes is short-term REIT paper. “It’s a good place to put money if you are looking for yield,” he said.

Dynegy to price

Using a credit spread of 450 basis points over Libor and a vol. of 29% and 26%, the Dynegy mandatory convertibles looked fine at the midpoint of talk, a New York-based trader said. But at the rich end of talk, it “looks crappy.”

The $400 million deal with a 15% greenshoe was talked at a coupon of 5.375% to 5.875% and a premium of 20% to 25%.

Existing paper in the space includes Exelon’s equity units. “Those are looking more attractive at where they are now,” a market source said. “They were below par last week, from about 56 to 58 in June.”

The Exelon convertible “may have cheapened a little dollar neutral,” said the market source, who favored the Exelon units because the company has a higher percentage of non-regulated assets than some of its peers.

Meanwhile Houston-based Dynegy is pricing its mandatory convertible preferred shares with a liquidation preference of $100 per share after the market close with 22.5 million shares of common stock.

Proceeds will be used to finance a portion of the purchase prices for the previously announced acquisitions of certain Midwest generation assets from Duke Energy Corp. and ownership interests in EquiPower Resources Corp. and Brayton Point Holdings, LLC from Energy Capital Partners.

Starwood Waypoint to price

No gray market was heard in either the Dynegy or the Starwood Waypoint deals. Starwood is pricing $150 million of three-year convertibles.

The company priced $150 million of its five-year notes in June. That paper was seen in trade at 96.875 versus an underlying share price of $25.50. That was down 2 points on a dollar-neutral, or hedged, basis. Later the paper was said to have contracted 3 points.

“I’m not surprised at all to hear about the contraction. The company announces its second deal in four months, with the new bond maturing before the existing. Terms on the new deal are 4.25%, up 22.5% at the midpoint of talk versus a share price of 3.1s up $28 on the existing. No doubt the olds were going to come in,” a New York-based trader said.

Oakland, Calif.-based Starwood is a REIT that acquires, renovates, leases, maintains and manages single-family homes.

Like the first deal, proceeds of the second deal are expected to be used to acquire additional homes and distressed and non-performing residential mortgage loans, to repurchase common shares and for general business purposes.

“Watch out for repeat issuers,” an East Coast-based buysider said.

Starwood Waypoint shares traded down $1.02, or nearly 4%, to $25.03 on Tuesday.

Mentioned in this article:

Dynegy Inc. NYSE: DYN

Exelon Corp. NYSE: EXC

GT Advanced Technologies Inc. Nasdaq: GTAT

NextEra Energy Inc. NYSE: MEE

Starwood Waypoint Residential Trust Nasdaq: SWAY

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