Dynegy finishes ‘in line’; Starwood Waypoint expands; E&P names suffer, Energy XXI drops

By Rebecca Melvin

New York, Oct. 8 – Dynegy Inc.’s newly priced 5.375% mandatory convertible preferreds ended their first trading day Wednesday flat, or in line with the underlying common stock, after the Houston-based electricity producer priced $400 million of the preferreds at the rich end of talked terms.

But Starwood Waypoint Residential Trust’s new 4.5% convertibles rose on both an outright and dollar-neutral, or hedged, basis after the Oakland, Calif.-based mortgage REIT priced $150 million of three-year senior notes at the cheap end of talked terms.

The new Starwood Waypoint ended the session right around 101.5, which was up about 1.25 points on swap, a New York-based trader said.

Elsewhere, the oil and natural gas exploration and production sector weakened on Wednesday with the shares of many names drooping to 52-week lows.

Energy XXI (Bermuda) Ltd.’s 3% convertibles due Dec. 15, 2018 traded down 4.5 points to 5 points amid a 20% slump in the underlying shares, and despite a rally back in the underlying shares, the convertibles weren’t seen to have recovered, a New York-based trader said.

Cobalt International Energy Inc. and Chesapeake Energy Corp. were also notably weak E&P names in convertibles.

Meanwhile, GT Advanced Technologies Inc.’s convertible bonds remained active with both the 2017 and 2020 convertibles settling in the mid-30 range with the underlying shares closing at $1.10.

The shorter-dated GT bonds seem to be the higher of the two, a trader said. Both issues have bounced around from between 25 to 41 since the Merrimack, N.H.-based solar and LED equipment company’s Chapter 11 bankruptcy filing on Monday.

A preliminary hearing in that case was set for Thursday.

Also in focus were Alcoa Inc.’s 5.375% mandatory convertible preferreds after the New York-based aluminum producer reported strong quarterly results after the market close.

The company said results were boosted by higher aluminum prices, and Alcoa shares were higher in after-hours trade.

The Alcoa report unofficially kicks off the new corporate earnings season.

Equities rallied strongly after the Federal Reserve released the minutes from its Sept. 16-17 meeting Wednesday afternoon.

“It seems like the minutes have caused a significant change of perception that the Fed might hold off on rate hikes for another two to three years,” a New York-based convertibles trader said.

The minutes showed that some officials are concerned about the impact of the U.S. dollar’s strength, and that it could keep longer-term inflation expectations below the committee’s objective. Previously the expectation was for hikes to begin next June.

“We’re seeing discussion of two to three years out, and not being able to hit inflation targets until then; but we’ll see how Europe shakes out,” the trader said.

The trader said that the development could be positive for the convertibles market.

“Given that the majority of the convert universe is in the two- to three-year bucket, and given that expectations for a shift by 15 basis points makes things look theoretically cheaper than they were, this could be good for convertibles,” he said.

Also it should give a bid to fixed income, which provides reference to the convert market, he said. “The CDX high-yield index is rallying and people will likely feel better about putting money back to work.”

A question mark remains over Europe. Its slow growth is among the reasons the Fed looks concerned about moving rates too soon. And Europe’s difficult economic picture has affected investors.

“The bid from European fundamental outright accounts has all but disappeared. Until we get some of those accounts back, it will remain difficult,” the trader said.

After the market close, Anacor Pharmaceuticals Inc. launched an offering of $70 million of seven-year convertible senior notes to yield 2.5% to 3% with an initial conversion premium of 30% to 35%.

New Dynegy trades flat

The new Dynegy mandatories closed the day at 100 with the common stock down 16 cents, or 0.5%, at $31.04. They were also quoted at 99.25 bid, 99.75 offered during the session.

The securities had started the day in line, then gained about 0.25 point on swap, but finished flat, dollar neutral, a trader said.

The new mandatories priced at the rich end of talk for a 5.375% dividend and 25% premium.

The $400 million convertible mandatory priced concurrently with 22.5 million shares of common stock at $31.00 per share.

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

Starwood Waypoint’s new 4.5% convertibles due 2017 were seen trading up 1.5 points out of the gate, and they ended there at 101.5.

Starwood shares ended up 19 cents, or 0.8%, at $25.22 on Wednesday.

“They priced at the cheap end, and looked like the Starwood deal from last week,” a trader said of the $150 million deal of three-year convertibles.

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

Energy XXI drops

Energy XXI’s convertibles fell to 75.5 on Wednesday from around 80 on Tuesday, a New York-based trader said.

Shares ended up 13 cents, or 1.3% to $10.05. But they had slumped 20% intraday.

“Some of the weakest names of the sector closed up on the day,” the trader said of E&P stocks. But for some companies like Energy XXI, the convertibles did not improve with shares.

“Liquidity is still tough overall in convertibles, and bonds are still better to sell – specifically in heavier credit names,” the trader said.

Meanwhile the E&P sector has come in on a glut of natural gas and as oil continues to sell off, the trader said.

Pricing is getting close to an inflection point in which companies are not making enough to compensate for the cost of production, he said.

Anacor on tap

Anacor Pharmaceuticals’ deal was seen doing well despite recent market volatility.

“This is a neat story and people in biotech care about this company,” a trader said.

Anacor is a Palo Alto, Calif.-based biopharmaceutical company focused on novel small-molecule therapeutics derived from its boron chemistry platform.

The Rule 144A deal was seen pricing after the market close on Thursday.

There is a $7 million greenshoe for the deal being sold by bookrunner Goldman Sachs & Co.

There is a concurrent $12 million of notes that is likely being purchased by certain funds affiliated with Venrock Associates.

A portion of the proceeds will be used to repay Anacor’s outstanding debt under its loan and security agreement, with remaining proceeds for general corporate purposes.

As of June 30, there was $30 million of loans outstanding under the loan and security agreement. In connection with repayment, Anacor will be subject to a prepayment fee equal to 2% of the principal repaid.

The notes are non-callable until Oct. 15, 2018 and then are provisionally callable if shares exceed 130% of the conversion price for at least 20 trading days out of 30.

Mentioned in this article:

Anacor Pharmaceuticals Inc. Nasdaq: ANAC

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Inc. NYSE: CIE

Dynegy Inc. NYSE: DYN

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

GT Advanced Technologies Inc. Nasdaq: GTAT

Starwood Waypoint Residential Trust Nasdaq: SWAY

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