Planned Stanley Black & Decker seen 3-4 points cheap; Developers Diversified up in gray

By Rebecca Melvin

New York, Nov. 1 - A new issue from Stanley Black & Decker Inc. for $550 million of convertible preferred units was bid "plus 2" in the gray market Monday ahead of final terms expected after the market close.

Despite its structure, which is more complicated than most convertibles, the new Stanley Black & Decker deal was enthusiastically welcomed in the market given the company's investment-grade status and better than $10 billion market capitalization.

Developers Diversified Realty Corp.'s planned $300 million of 30-year convertible senior notes was bid "plus 1," and that paper with its lower coupon, talked at 1.5% to 2%, was also seen getting done successfully late Monday.

The new Developers Diversified deal appeared to spur some trading of convertible paper in the real estate investment trust sector.

"It looked to me that some of the longer-dated, in-the-money REITs were trading, with stuff that was rich moving lower and with the cheaper paper moving higher," a New York-based sellside trader said.

Nevertheless, actively traded REIT paper of names like ProLogis and Vornado were essentially unchanged.

The ProLogis 1.875% convertibles trade more like straight fixed income as they have little optionality left, the sellsider noted.

Elsewhere, Allergan Inc.'s convertibles were slightly lower by 0.125 point on a dollar-neutral basis after the Irvine, Calif.-based maker of Botox swung to a third-quarter loss amid charges.

Otherwise, it was a quiet session, with the market primarily focused on the two new issues launched early Monday for pricing late in the day, and as market players await Tuesday's election results and Wednesday's expected Federal Reserve announcement on quantitative easing.

In addition, markets were closed in Europe, which contributed to a quieter tone.

"It was pretty quiet. There was nothing of note. With some of the big markets in Europe closed, there were less orders coming in here," a New York-based sellside analyst said.

Stanley Black & Decker eyed

The new Stanley Black & Decker deal, which is called a convertible preferred unit, but which is being treated as a five-year preferred, was seen bid at 102 in the gray market ahead of final pricing, according to market sources.

At the midpoint of talk, the new deal modeled about 3 or 4 points cheap, using a credit spread of 400 basis points over Libor and an 18% vol., a New York-based sellside analyst said.

Some players might go tighter on the credit like 325 bps to 350 bps, the sellsider said.

"At the mids, it looks pretty cheap and it's going to get a lot of outright demand," the analyst said.

The common dividend is 2% versus the convertible preferred at 5%. It's going to break even in three years at the mids; not in terms of common dividend yield, but in terms of points over parity divided by the coupon, the analyst said.

On the equity side, Stanley Black & Decker has a positive consensus with seven buys, three holds and no sells, the analyst said.

The New Britain, Conn.-based provider of hand tools, power tools and related accessories has a lot of name recognition, and its market cap of $10 billion and enterprise value of $12 billion contribute to making it a desirable issue.

Part of the issue's strong suit is that the deal size of $550 million is small in proportion to the company's $10 billion market capitalization.

In addition, the company is using proceeds to redeem subordinated debt.

While the deal's structure is "weird," it's still favorable as it is essentially a preferred backed by a junior subordinated note for the first five years.

The company is actually selling a unit that is comprised of a purchase contract with a note.

At the end of five years, the purchase contract will be converted into a perpetual preferred and then it's immediately callable after that.

The units at $100 each were being talked to yield 4.75% to 5.25% with an initial conversion premium of 17.5% to 22.5%.

Merrill Lynch, Pierce, Fenner & Smith Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. Inc. are the joint bookrunners.

Proceeds will be used to redeem Stanley Black & Decker's 5.902% fixed-rate/floating-rate junior subordinated debt securities due 2045, to improve the funded status of its pension obligations, to reduce outstanding short-term borrowings and for other general corporate purposes.

The company also intends to use a portion of the unit proceeds to enter into capped call transactions with counterparties, which will raise the effective conversion premium from the issuer's perspective to about 60%.

Developers Diversified to price

Developers Diversified launched an offering of $300 million of 30-year convertible senior notes talked at a coupon of 1.5% to 2% and an initial conversion premium of 22.5% to 27.5%.

The paper's low coupon was mentioned as a detraction, but the paper is "fine and modeled up attractive," a New York-based sellsider said.

The sellsider was using a credit spread of 260 bps over Libor with a vol. in the low 20s.

Rather than looking at the valuation, however, he was looking at implied vol. And he saw the deal as having a yield advantage.

Developers Diversified has existing convertible paper, but there was little left outstanding on it and it was not seen trading.

There is a $45 million greenshoe on the registered deal, which is being sold via joint bookrunners J.P. Morgan Securities, Goldman Sachs & Co., Deutsche Bank Securities Inc. and UBS Securities LLC.

The notes are non-callable for five years, and there are puts in years 2015, 2020, 2025, 2030 and 2035.

There is contingent conversion if shares exceed 125% of the conversion price.

Proceeds will be used to reduce balances on the company's corporate revolving credit facilities and for general corporate purposes.

Developers Diversified is a Beachwood, Ohio-based real estate investment trust that focuses on shopping centers and business centers.

Mentioned in this article:

Allergan Inc. NYSE: AGN

Developers Diversified Realty Corp. NYSE: DDR

Stanley Black & Decker Inc. NYSE: SWK

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