Tesla trades 'in line' with shares after car fire news; DDR improves; Campus Crest prices

By Rebecca Melvin

New York, Oct. 3 - Convertibles saw a generally stronger bid on Thursday while equity markets extended losses as day three of the U.S. government's partial shutdown unfolded with no signs of progress toward a resolution between congressional Democrats and Republicans on the budget impasse.

Tesla Motors Inc.'s convertibles dropped outright in early action as shares traded down on reports of a battery-related fire of the Palo Alto, Calif.-based electric car maker's Model S car. But the Tesla convertibles bounced back and were seen to have traded in line with the underlying shares.

DDR Corp., an Ohio-based shopping mall real estate investment trust, was lower on an outright basis but improved on a dollar-neutral, or hedged, basis in active trade Thursday.

The DDR bond "was definitely better to buy, as were most names," a New York-based traders said.

Tower Group International Ltd.'s convertibles traded back up to around 95 as market players wait for a quarterly earnings report from the ailing Bermuda-based property and casualty insurance and reinsurance company next week.

"At this point, people are waiting to see what happens when they report next week at some point and then we'll figure out what the size of the hole is," an East Coast-based convertibles analyst said. Late last week, the shares and the convertibles of Tower gapped lower on speculation that the company's reserving loss problem may require a reorganization.

The primary market was stirred from a week-long slumber after a small, $75 million deal launched from Campus Crest Communities Inc. The Charlotte, N.C.-based student housing company paper later priced an upsized $85 million of five-year exchangeable senior notes at par to yield 4.75% with an initial conversion premium of 25%.

The deal was talked at a 4.25% to 4.75% coupon and a 22.5% to 27.5% initial conversion premium.

The Campus Crest convertible deal was seen at fair value at the midpoint of talk using a credit spread of 500 basis points over Libor and a 22% vol.

But there was at least one source with higher credit spread and vol. inputs. One analyst said he was rather negative on the name and had a higher credit spread of 625 bps to 650 bps on the paper and a 25% vol.

A new deal for $85 million with multiple underwriters was not going to do much to satisfy a market that is hungry for new paper. But the pause that the convertible primary market has seen was not concerning to one convertibles analyst.

"It's not unusual to see this kind of pause. The market has been down for two weeks in front of the sequester, and now government shutdown. Lower share prices discourage issues. In addition, there is not a lot of investment banking that happens in late August to early September and these things take a while to germinate," the analyst said.

But, he said, based on discussions with various banks, he believed there would be a decent primary calendar for the rest of the year.

Tesla bounces back

Tesla's 1.5% convertibles due 2018 traded down to 153.75 and 154.75 in the early going Thursday, which was down from as high as 170 early Tuesday, according to Trace data. Shares were down 4.8% at $172.22 at that time.

But in later trading, the Tesla bonds bounced back and were seen at 173 and 174.50, market sources said.

Shares of the electric car maker ended the session down $7.64, or 4.2%, at $173.31.

The drop was caused by reports and video footage of one of Tesla's Model S cars on fire after a collision.

The bonds were seen as 4 points cheap when they were 184.5 earlier in the week.

At 173, it was still seen 3.5 points cheap, using a credit spread of 400 bps and a 45% vol.

DDR adds

DDR's 1.75% convertibles due 2040 closed Thursday at 114.095 versus an underlying share price of $15.84, which compared to a level on Monday of 115.407 with the shares closing at $16.10.

"The DDRs were up 0.25 today and maybe 0.75 in the last few days," a New York-based trader said.

Shares were lower Thursday by 2.4%.

The bonds trade on about a 60% to 70% delta, a trader said.

Campus Crest eyed

Campus Crest's initially planned $75 million of five-year exchangeable senior notes were seen at fair value at the midpoint of talk using a credit spread of 500 bps over Libor and a 22% vol., according to a Connecticut-based trader.

The bonds were seen pricing at a 4.25% to 4.75% coupon and a 22.5% to 27.5% initial conversion premium late Thursday.

A second source said he was using a significantly higher credit spread of 625 bps to 650 bps over Libor, but he admitted he was "probably more negative on the spread than most people because they run with very little cash and fund with the revolver."

He said that the real estate investment trust was "relatively levered."

The planned exchangeables are non-callable with no puts.

Barclays, Citigroup Global Markets Inc. and BofA Merrill Lynch were the active bookrunners, and Raymond James & Associates Inc. and RBC Capital Markets LLC were the passive bookrunners of the Rule 144A offering, which has a greenshoe of $11.25 million.

Proceeds will be used to repay debt, for future development and for other general corporate and working capital purposes.

Mentioned in this article:

Campus Crest Communities Inc. NYSE: CCG

DDR Corp. NYSE: DDR

Tesla Motors Inc. Nasdaq: TSLA

Tower Group International Ltd. Nasdaq: TWGP

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