New iStar rises, then fades with stock after deal upsizing; Molycorp slips with shares

By Rebecca Melvin

New York, Nov. 8 - iStar Financial Inc.'s newly priced 3% convertibles expanded early on their Thursday debut in the secondary market but later faded with weaker shares of the New York-based commercial real estate lender.

iStar priced $175 million of the notes at the rich end of talk, which was increased from the originally talked deal size of $100 million.

The new issue was around 100.5 with the underlying shares down 1.75% to 2%, but by the market close, shares were down more than 4% and the bonds were at 99.5.

Trading was active, with one source calling the iStar convertible "the soup de jour."

Elsewhere, Molycorp Inc.'s convertibles were in focus and down in line with the underlying shares ahead of the earnings release expected post close from the Greenwood Village, Colo.-based rare earth minerals producer.

Goodrich Petroleum Corp.'s 5% convertibles due 2029 stabilized around 92.5 after falling about 2 points on disappointing earnings Wednesday from the Houston-based oil and natural gas company.

"The bonds got hit with bad earnings," a trader said about the Goodrich convertibles, which trade mostly on an outright basis.

Molson Coors Brewing Co.'s convertibles were steady after the Denver-based beer maker reported earnings that took shares lower for two straight days.

Gold names were pretty active Thursday, with shares of Kinross Gold Corp. up 8%.

Equities extended losses. The Dow Jones industrial average fell another 121.41, or nearly 1%, to 12,811.32, on top of a more than 300-point slide Wednesday; the S&P 500 stock index fell 17.02 points, or 1.2%, to 1,377.51, on top of a 2.4% decline, and the Nasdaq composite stock index lost 41.70 points, or 1.4%, to 2,895.58.

iStar sells 'reasonably well'

iStar's newly priced 3% convertible senior notes due 2016 closed at about 99.5 with the underlying shares settling down 36 cents, or 4.3%, at $7.91.

The new bonds had initially moved up, but came off and followed the underlying shares as they "traded around," a syndicate source said.

"The stock definitely paled," the source said.

At midafternoon, a trader said that the paper was up a point or more on a dollar-neutral, or hedged, basis on a 45% to 50% delta. At that point the bonds were about 100.5 and the shares were lower by 1.75% to 2%.

The stock borrow on the deal was tight, but it could be hedged with credit default swaps, a New York-based trader said.

"It models up fairly cheap and there is a liquid CDS market, so guys can hedge it," the trader said.

The bonds were more active than expected given that the issue was substantially upsized from $100 million to $175 million.

"It got a lot more attention with the upsize. There are people who just don't play it at $100 million because of liquidity concerns," the syndicate source said.

Borrow not great

Some players sat this one out. One buysider didn't get involved because he thought the bonds were only at fair value and that the issue was too small.

Because he initially did not put in for an allocation, he wasn't made aware of the upsizing.

Another strike against the issue was that the availability of stock to borrow isn't that good, a New York-based trader said.

But while the stock borrow wasn't that good, it could be hedged with credit default swaps, the trader said of the low delta name.

Given that the bonds have a shorter-than-average, four-year duration, the bond floor is pretty high at 90 to 91, he said.

A lot was flipped back to the underwriters, the trader said, regarding market activity in the name on Thursday.

Joint bookrunners were Bank of America Merrill Lynch, Barclays and J.P. Morgan Securities LLC. There are no co-managers.

The issue came at the rich end of talk, which was set at a yield of 3% to 3.5% and an initial conversion premium of 37.5% to 42.5%.

The company also sold an upsized $300 million of straight bonds due 2018 with a 7.125% coupon.

The convertibles are non-callable for life, with no puts. There is dividend and takeover protection.

Proceeds are expected to be used to redeem $67 million principal amount of iStar's 6.5% senior straight notes due 2013 with the remainder earmarked for buying back a portion of its 8.625% senior straight notes due 2013.

Molycorp down in line

Molycorp's 3.25% convertibles due 2016 moved down to 66 bid, 67 offered.

Molycorp shares ended down 29 cents, or 3.2%, to $8.68 in average volume.

"The stock was down 5% going into earnings and the convertibles nuked down with it," a New York-based trader said.

Molycorp swung to a third-quarter loss of $18.9 million, or 19 cents a share, compared to earnings of $45.4 million, or 49 cents a share, in the year-earlier period.

Molycorp's revenue rose 49% to $205.6 million on sales of 4.391 tonnes of total rare earth and rare metal products.

Molycorp said its third-quarter results were hit by significantly lower realized rare earth prices and higher production costs. There was also a one-time charge related to the takeover of Neo Material Technologies and inventory write downs.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Goodrich Petroleum Corp. NYSE: GDP

iStar Financial Inc. NYSE: SFI

Kinross Gold Corp. NYSE: KGC

Molson Coors Brewing Co. NYSE: TAP

Molycorp Inc. NYSE: MCP

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