Stanley Black & Decker jumps; Developers Diversified trades well on debut; Gaylord active

By Rebecca Melvin

New York, Nov. 2 - Convertible bond players were upbeat about the two new issues released for secondary dealings on Tuesday.

Both deals were said to be well priced and traded up, although they went in "kind of different directions," a New York-based sellside trader observed.

Stanley Black & Decker Inc.'s newly priced 4.75% convertible preferred units jumped early in active trade, with a market seen at 104.5 bid, 105.25 offered before the open.

Given that jump, hedge players mostly flipped out of it, and it ended up primarily in outright investors' hands, the trader said.

Meanwhile, Developers Diversified Realty Corp.'s newly priced 1.75% convertible senior notes traded a bit higher early Tuesday to 100.5 bid, 101 offered, and while they were up some on a dollar-neutral basis, it wasn't enough over fair value to promote selling them back, and therefore the issue looked to continue to have significant hedge participation.

"A good number are going to keep them on the pad and set them up," the trader said.

Elsewhere, Gaylord Entertainment Co.'s convertibles traded at 141 versus a share price of $33.65 after the Nashville, Tenn.-based lodging company reported a wider loss of $32 million for its third quarter. And Goodrich Petroleum Corp. was an active name.

Otherwise, volume for the session was seen as "anemic," with some trading of the typical benchmark issues like Transocean Ltd. and Vornado Realty Trust, but not much else of note on the day.

This convertibles market isn't poised in the same way as some of the broader markets may be for the results of this week's U.S. midterm elections or the Federal Reserve's announcement on quantitative easing, given the underlying supply-demand imbalance that exists.

"I think that [what] we're really waiting for is deals and the end of the year," a sellsider said, adding that until those things happen, there probably won't be any major market moves.

As for new issues, anything that comes "structured with decent pricing as the two deals today were will be sucked up," he said.

Stanley Black & Decker jumps

Stanley Black & Decker's 4.75% convertible preferred units ended the session right about 103.8, according to one New York-based sellside analyst, and that was versus a closing share price of $61.57, which was up 0.6% on the day for the New Britain, Conn.-based provider of power tools and related accessories.

Earlier in the session, the new Stanley Black & Decker paper traded at 105, and in late morning - when shares were at their lows - the market was called 104.25 bid, 104.75 offered.

"People would rather have a bond than a preferred instrument, but this being investment grade counteracted that a bit," a New York-based sellside trader said.

Another sellsider said the paper didn't model that well, but they were great for investment-grade value.

Stanley Black & Decker priced $550 million of convertible preferred units at $100 each. Each unit consists of a purchase contract for preferred stock, which has a dividend of 4.75% and initial conversion premium of 22.5%, and an underlying bond.

The registered deal, which has an over-allotment option for up to $82.5 million of additional units, came at the rich end of talk, which was for a 4.75%-5.25% dividend and a 17.5%-22.5% initial conversion premium.

"The thing with SWK is that it really did look like it was priced to move, and as a result of that, they got it done very nicely," a sellsider said.

"I suspect that it went to outrights. Hedge guys said they flipped out because it traded up with the common, and above fair value," the sellsider said.

The preferred stock matures Nov. 17, 2015. And at five years, if the units aren't called, the issue turns into a perpetual preferred stock. The underlying bond is a 4.25% junior subordinated note due Nov. 17, 2018.

Bank of America Merrill Lynch, Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. Inc. were the joint bookrunners of the offering.

Proceeds are being 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 used about $50 million of the proceeds to enter into capped call transactions with counterparties, which raises the effective conversion premium from the issuer's perspective to about 60%.

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. Some players might have gone tighter on the credit like 300 bps to 350 bps.

Developers Diversified rises

Developers Diversified's 1.75% convertible senior notes due 2040 were seen last at 101.4, according to a New York-based sellside analyst. That price was higher than they had been for most of the day and seemed to correspond with a late rise in the underlying shares.

Shares of the Beachwood, Ohio-based real estate investment trust settled up at $13.04, which was up 19 cents, or 1.5%, on the day, and much of that rise came late in the session.

Earlier the new paper of the REIT focused on shopping centers and business centers traded at 100.5 bid, 101 offered. Later it was seen tighter at 100.5 bid, 100.75 offered, and then it slipped to 100.125.

"DDR seemed to come at a more fair valuation, or a little bit cheap, and it traded up a little bit on a dollar-neutral basis, but not hugely like the other one," a New York-based sellside trader said, referring to the Stanley Black & Decker paper.

"The stock behaved itself but didn't rally, and that got a lot of people sitting tight," the sellsider said.

While REITs are generally met with mixed reviews given that hedge players have a hard time justifying the cost related to REITs' typically fat yields on the common, Developers Diversified represents an issue-specific situation. Its dividend is a very small, or 0.6% yield on the common, and therefore it doesn't have the "big knock against it" that most REITs do.

Generally, REITs are unattractive because it's difficult to generate the kind of cash flow necessary to justify holding that type of paper, but that's not the case with Developers Diversified.

The new Developers Diversified convertibles traded actively on Tuesday, with about $168 million of bonds changing hands, or about 20% of the day's total volume, according to Trace data, the sellsider said.

Developers Diversified upsized its deal by $5 million to $305 million.

The registered deal came at the midpoint of coupon talk, which was 1.5% to 2%, and at the rich end of the 22.5% to 27.5% premium talk.

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

KeyBanc Capital Markets Inc., RBC Capital Markets Corp., Scotia Capital (USA) Inc. and U.S. Bancorp Investments Inc. served as senior co-managers, while Daiwa Capital Markets America Inc., FBR Capital Markets & Co., ING Financial Markets LLC and RBS Securities Inc. served as co-managers.

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

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

Mentioned in this article:

Developers Diversified Realty Corp. NYSE: DDR

Gaylord Entertainment Co. NYSE: GET

Goodrich Petroleum Corp. NYSE: GDP

Stanley Black & Decker Inc. NYSE: SWK

Transocean Ltd. NYSE: RIG

Vornado Realty Trust NYSE: VNO

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