Molson Coors climbs on debut; NorthStar prices at cheaps; Sunstone quiet in gray; Trex sees no borrow

By Kenneth Lim

Boston, June 12 - Molson Coors Brewing Co. barreled ahead on its secondary market debut Tuesday in an otherwise lackluster session for convertibles.

Molson Coors benefited from a rising stock and strong interest from outright investors, who were eager for new investment-grade paper and exposure to the food and beverage sector.

The gray market, however, was quiet for the new issues that were expected to price after the market closed.

"When the market's so lousy, nobody's going have a gray market," a sellside convertible trader said. "It's not that the convert market's in bad shape. The bond market is in pretty nasty condition now, driving the stock market lower, the convert guy's got exposure on both of those fronts, so he's not going to expose himself in the gray market. It's self preservation. There's no gray market out of a sense of self preservation."

Sunstone Hotel Investors Inc., NorthStar Realty Finance Corp. and Trex Co. Inc. were expected to price their new convertibles on Tuesday after the close. The deals by Sunstone and NorthStar were seen as unexciting at the midpoint of talk, while Trex's offering was expected to be mostly an outright affair with no stock to borrow for hedge funds.

NorthStar's deal priced at the cheap end of talk after the market closed to yield 7.25% with an initial conversion premium of 27.5%.

Molson Coors gets outright boost

Molson Coors' new 2.5% convertible due 2013 finished up about a point outright on Tuesday after strong outright support helped drive prices up on its debut.

The convertible, which was offered at par, closed at 101 against a stock price of $89.60. Molson Coors stock (NYSE: TAP) finished higher by 2.27% or $1.99 at $89.60.

"The Molson deal that came last night, it didn't look good when I modeled it out and it still doesn't look good in my model, but I heard that there was a lot of outright interest that's pushing it up," a sellside convertible analyst said.

Molson priced the $500 million deal on Monday after the market closed with an initial conversion premium of 25%. The deal was talked at a coupon of 2.375% to 2.875% and an initial conversion premium of 22.5% to 27.5%.

There is an over-allotment option for a further $75 million.

Citigroup and Deutsche Bank were the bookrunners of the registered offering.

Molson Coors, a Golden, Colo.-based brewing company, said it will use $397 million of the proceeds to partly fund subsidiary Coors Brewing Co.'s cash tender offer to redeem $450 million of 6.375% senior notes due 2012. That tender offer was announced Monday and expires July 10. Another $45 million of the proceeds will fund convertible note hedge and warrant transactions while a further $50 million will fund a voluntary pension contribution.

"I heard about three quarters of this went to outright guys," the analyst said. "It's trading at an implied vol that's something ridiculous like 25% to 26%, when this is actually a 22% vol. It traded a lot today and that's always a sure sign that people are flipping it."

The analyst said the outright interest stemmed from the fact that there are very few outstanding convertibles like the ones issued by Molson Coors.

"There's not that many food and beverage converts out there and there's definitely not that many that are investment grade," the analyst said. "We're actually having a shrinking group of investment-grade convertibles compared to the overall market, so this is a really good one for outright guys, especially those that are benchmarking to an index."

A convertible trader agreed that most of the support for the deal came from outright investors.

"Yesterday I was telling my guys here's a chance for you guys, you have a portfolio and you can change the balance a little bit by shifting some of your portfolio to a sector that you don't have a lot of exposure in," the trader said.

Sunstone seen fair to rich

Sunstone Hotel's planned $220 million offering of 20-year exchangeable senior notes was quiet in the gray market on Tuesday as critics described the deal as unexciting and possible rich at the midpoint of talk.

Sunstone's deal was expected to price after the market closed. It was talked at a coupon of 4.3% to 4.6%, an initial exchange premium of 23% to 25% and reoffered at 99.5.

The notes are issued by Sunstone's operating partnership, Sunstone Hotel Partnership LLC and will be exchangeable into Sunstone's common stock.

There is an over-allotment option for a further $30 million.

Bear Stearns is the bookrunner for the Rule 144A offering.

Sunstone, a San Clemente, Calif.-based real estate investment trust with a portfolio of hotel properties, said it will use the proceeds to pay down a $175 million loan on the Hyatt Regency Century Plaza Hotel and to buy back up to $60.2 million of its common stock. Sunstone on Monday said its board approved a $100 million stock buyback program.

"I have it about fair," a sellside convertible analyst said. "I don't think that's going to get anyone excited."

The analyst used a credit spread in the low 200 basis points over Treasuries range and a volatility in the low 20% region, explaining that the company appeared to support a "weak double B or high single B credit."

But another convertible analyst thought that the deal modeled bad using even more aggressive assumptions.

"I'm using an even more aggressive spread than that and a little bit higher vol, and even there it didn't look good," the analyst said. "It was about half a point rich for me. They may have to bring down the reoffer price...They might bring down the reoffer price, otherwise I don't see how this is good."

NorthStar common yield worries some

NorthStar priced its $150 million offering of 20-year exchangeable senior notes at the cheap end of talk on Tuesday after the deal was seen as slightly cheap but burdened by a large yield disadvantage compared to the common.

The exchangeables priced to yield 7.25% with an initial exchange premium of 27.5%. They were offered at par. The deal was talked at a coupon of 6.75% to 7.25% and an initial exchange premium of 27.5% to 32.5%.

The exchangeables are issued by NorthStar's operating partnership, NorthStar Realty Finance LP, and are exchangeable into NorthStar common stock.

There is an over-allotment option for a further $22.5 million.

Banc of America and Wachovia Securities are the bookrunners of the Rule 144A offering.

NorthStar, a New York-based real estate finance company that focuses on real estate debt and securities and net lease properties, said the proceeds of the deal will be used to repay existing debt, acquire investment and fund general purposes.

A couple of convertible analysts said the deal modeled almost a point cheap at the midpoint of talk using a credit spread in the mid-400 bps over Treasuries region and a volatility in the high 20% range. But both analysts noted that the common stock yields significantly more than the convertible, which could discourage some hedge funds from participating.

"It modeled a little bit cheap but I'm not sure how interesting it's going to be," one analyst said. "It's got a big yield on the common and that tends to keep hedge guys away even if it sets up nicely."

The other analyst said the deal would probably see more outright interest.

"The common yield is over 10%, which means that the carry is atrocious on this," the second analyst said. "So it's probably also going to go to outright funds, but I don't know many outright funds that want to dabble in mortgage REITs at this moment."

Mortgage REIT deals increase

A convertible analyst noted that mortgage REITs such as NorthStar and Annaly Capital Management Inc. have been more active in raising capital through convertibles over the past few months.

"A number of mortgage REITs have come to the market," the analyst said. "You had Annaly a while back and they were the only ones, and you've had a number of odd ones since then. You've got Thornburg [Mortgage Inc.] as well."

The analyst said mortgage REITs could be the last segment of the REIT sector to begin tapping the convertible market.

"This is really the last group in the REIT sector that's coming to the convert market and I'm not sure if it's just that investment bankers have run out the string with the REIT sector or just that some other fundraising capital alternatives are starting to look less attractive now," the analyst said.

"With some of these commercial mortgage REITs that you've seen, perhaps they're thinking that it's going to be more difficult for them to raise money in the CDO market because of some of the fallout in the subprime crisis."

Convertibles are typically not the first fundraising choice for companies, the analyst explained. Companies usually turn to convertibles when straight debt is too expensive or they want to sell equity at a premium, or a combination of that.

"Maybe they're just shoring up for the future and maybe they're going to have to start looking for alternatives to CDOs and they can raise equity here at a little bit of a premium as well," the analyst said.

But a convertible trader said mortgage REITs may not have much luck in today's convertible environment as well.

"Why would guys fall over themselves to get in on new deals in a rising rate environment?" the trader said.

Trex faces borrow shortage

Trex's planned $85 million of five-year convertible senior subordinated notes was expected to be taken mostly by outrights with a lack of stock borrow keeping hedge investors away.

"First of all, it's a small deal," a convertible analyst said. "The borrow is impossible on this, I hear. It's something that the outright guys are definitely going to be playing more than the hedge funds just because there's no borrow. And it's a small company, so it's one of those where you have to believe in the story."

Trex's deal had price talk at a coupon of 4.5% to 5.5% and an initial conversion premium of 20% to 25%.

The convertibles were offered at par.

There is an over-allotment option for a further $10 million.

JPMorgan is the bookrunner of the registered offering.

Trex, a Winchester, Va.-based maker of wood-alternative decking, railing and fencing products, said it will use $25.7 million of the proceeds to repay its outstanding $24 million of 8.32% senior secured notes due 2009. It will also use the proceeds to repay an existing $45.8 million of senior secured revolving loan and fund general purposes.

Another convertible analyst said assessing the company on an outright basis was complicated as well, partly because the company's stock was at a 52-week low with the business facing short-term issues despite having an interesting long-term story.

"They're definitely the market leader and they're growing, but they're facing short-term issues like high polyethylene prices due to high oil and gas prices and some quality control issues," the second analyst said.

"The management says they're trying to turn that around, and the market's just trying to watch and see if they can execute that. If it does turn around then it's a great story, but if it doesn't there's still more concern. There's good long-term upside, but can they turn around? There's definitely value, and I could imagine that somebody would be interested in buying the company."

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