New Extra Space slightly outperforms shares; older Extra Space adds; market awaits Fed decision

By Rebecca Melvin

New York, Sept. 16 – Extra Space Storage Inc.’s newly priced 3.125% exchangeables traded right around par for much of Wednesday after the Salt Lake City-based real estate investment trust priced $500 million of the 20-year senior notes at the cheap end of talked terms.

At late morning, the Extra Space paper was quoted 99.75 bid, 100.25 offered with the underlying shares at $74.48, which was down 34 cents, or about 0.5%.

That was ever so slightly better than the underlying stock, a Connecticut-based trader said.

The older Extra Space 2.375% exchangeables due 2033 were better on the company’s agreement to repurchase $165 million of the outstanding older notes concurrently with the pricing of the new deal.

“The olds were trading around 2 points before, and holders got paid 3.2 points over parity,” the trader said.

Elsewhere, much of the convertible market was described as unchanged on swap. There was a good amount of focus on the new deal, which was of the chunky $500 million base deal size that promises better liquidity going forward than the smaller convertible deals, but it wasn’t the only name trading, a New York-based trader said.

“It wasn’t the only focus, but most guys are waiting until tomorrow to see what the Fed does,” the trader said.

A second New York trader concurred: “The majority of [convertibles] names are unchanged to a little better, generically speaking, as most people are waiting for the Fed.”

There was some trading of Chesapeake Energy Corp., which was higher on an outright basis in tandem with higher shares and higher energy prices. The price of West Texas Intermediate crude oil for October delivery surged $2.53, or nearly 6%, to $47.12 on the New York Mercantile Exchange on Wednesday.

Chinese internet stocks were also trading up, and the convertibles of names like Ctrip.com International Ltd. were also higher. Ctrip shares surged 8%, rebounding from weakness on Monday and Tuesday.

But most of the moves in convertibles were flat, or in line with their underlying shares, as convertibles players wait and see what happens in the broader markets on Thursday after the Federal Reserve announces its decision on whether to begin lifting its federal funds rate or not.

The equity markets were higher in thin volume as well, with the S&P 500 index picking up 17.22 points, or 0.9%, to end the session at 1,995.31.

“Tomorrow is going to be a big day,” a New York-based trader said, indicating that all eyes are on Thursday’s afternoon Fed statement and press conference.

New Extra Storage edges up

Extra Space’s 3.125% convertibles due 2035 traded right around par for much of the session. The new paper was seen 99.75 bid, 100.25 offered with the underlying shares at $74.48 at late morning.

That was up about 0.125 point on a swap basis, a trader said.

At the end of the session, the underlying shares were a bit weaker, closing down 79 cents, or 1.1%, to $74.03, and that may have pulled the exchangeables down a little further, the trader said. But there was no notable shift in pricing.

The new deal came at the cheap end of talked terms, and the stock didn’t perform horrendously, but nevertheless the new paper didn’t perform especially strongly because of its business in the REIT sector.

“There was some hesitation with it being a REIT with a large premium, and it was assumed that the stock would never get to the strike price, which is probably fair,” a New York-based trader said.

For that reason, the deal was not well received in the outright community, as may have been expected, the trader said.

This was not the case for Dycom Industries Inc., the specialty contracting services company, which priced a deal last week that was favored by outright players. The Dycom bonds have expanded about 1.5 points since issue, the trader said.

Extra Storage priced its 3.125% 20-year exchangeable senior notes with a 27.5% conversion premium. That was the cheap end of talk for a 2.625% to 3.125% coupon and 27.5% to 32.5% premium.

The Rule 144A deal has a $75 million greenshoe and was sold via joint bookrunning managers Citigroup Global Markets Inc. and Wells Fargo Securities LLC.

The exchangeables are non-callable for five years, with puts in years five, 10 and 15.

Proceeds will be used to fund potential acquisitions, including the company’s previously announced acquisition of SmartStop Self Storage, Inc., to retire outstanding debt and for other general corporate and working capital purposes.

Older Extra Storage improves

The older Extra Storage 2.375% convertibles were seen at 138 at the close Tuesday, which was up from 133.875 bid, 134.125 offered earlier in the day.

The 2.375% exchangeables were better on the company’s agreement to repurchase $164.6 million of the outstanding older notes concurrently with the pricing of the new deal.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Dycom Industries Inc. NYSE: DY

Extra Space Storage Inc. NYSE: EXT

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