Morning Commentary: Upsized Starwood Waypoint adds on debut; Salix jumps outright, flat on hedge

By Rebecca Melvin

New York, July 1 – Starwood Waypoint Residential Trust’s newly priced 3% convertibles edged up in the early going Tuesday after the Oakland, Calif.-based real estate investment trust priced an upsized $200 million of the five-year senior notes at the cheap end of talk.

The new Starwood convertibles were seen at 100.5 bid, 101.25 offered with the underlying shares up less than a dime. A second source quoted the new notes at 100.75 bid, 101.25 versus an underlying share price of $26.22, which he said made the paper higher on a dollar-neutral basis by 0.75 point from issue.

Salix Pharmaceuticals Ltd.’s convertibles jumped on an outright basis but were flat to slightly lower on a dollar-neutral, or hedged, basis with a surge in shares after the Raleigh, N.C.-based drug maker announced positive trial data on Rifaximin 550 mg as a treatment for irritable bowel syndrome with diarrhea.

The Salix 1.5% convertibles due 2019 were quoted at 213.75 bid, 214.25 offered with the underlying shares at $136.25, a New York-based trader said. That was “essentially in line dollar neutral, or maybe a touch lower, depending on delta coming into the day,” the trader said.

Tower Group International Ltd.’s 5% convertibles due in September were trading at 85 bid, 87 offered in the early going as shares of the Bermuda-based insurance and reinsurance company bounced higher by 11% following an 11% drop on Monday amid worries over its proposed takeout by ACP Re Ltd.

Tower agreed to be acquired by ACP Re in January. One concern is over the possibility of an insolvency event as defined under the merger agreement that might enable ACP to cancel the deal or negotiate another price reduction.

The Tower convertibles were down from the 90 to 91 range previously. A Connecticut-based trader said, “The risk reward is really hard. If this deal doesn’t go through, the bonds probably go down 40 points or more.”

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