Planned Extra Space reoffered, talk revised; Weyerhaeuser launches deal; Medivation eyed

By Rebecca Melvin

New York, June 17 - Extra Space Storage Inc. reoffered its planned $250 million of 20-year exchangeable senior notes at 98.5 on Monday, and terms were revised beyond the cheap end of initial talk. As of the market close, the deal was still not officially priced, a syndicate source said.

The Extra Space deal launched ahead of the market open with talked terms of 1.5% to 2% for the coupon and 30% to 35% for the initial conversion premium. Later, the deal was talked at a 2.375% coupon and a 30% premium.

Also ahead of the market open, Weyerhaeuser Co. launched an offering of $500 million of mandatory convertible preferred shares at par of $50 that were talked to yield 6.375% to 6.875% with an initial conversion premium of 15% to 20%. The offering was seen pricing after the market close Tuesday.

Back in established issues, Medivation Inc. was seen in trade with the underlying shares of the San Francisco-based biopharmaceutical company sharply lower on news that Johnson & Johnson has agreed to buy a competitor in the prostate cancer therapy space. There was also a hedge seller in Medivation in the early going, a market source said.

Moving in the opposite direction, ViroPharma Inc. shares jumped on buyout rumors. The Exton, Pa.-based biopharmaceutical company's 2% convertibles due 2017 traded at 168.965 on Monday.

The equity markets were in the green, although volatile, but the strength was seen as positive in undergirding continued strong new issuance in the convertibles market.

Market players have said that strong issuance should continue as long as the markets remain positive. The two new deals launched early Monday could yield as much as $862.5 million in new paper in the market in addition to the $110 million new issue of seven-year convertible senior notes of Encore Capital Group Inc. launched after the market close. That is on top of about $2 billion in new paper priced in the market last week, and about $1.4 billion priced the week before that.

"Talking with other desks, there is still a pipeline," a New York-based syndicate source said.

Extra Space reoffered

Extra Space, a Salt Lake City-based real estate investment trust focused on self-storage facilities, launched an offering of $250 million of 20-year exchangeable senior notes, which are putable in five years, ahead of the market open on Monday. The deal was seen as quite rich from investors' perspectives.

To get them close to fair value required a credit spread of about 152 basis points over Libor, using a 20% vol. and 75 bps of borrow at the midpoint of talk. And that credit spread seemed too tight to several sources.

The underwriter was said to be using a credit spread of about 110 bps over Libor, which was even tighter.

But later the deal's terms were revised and the deal was reoffered at 98.5, which pulled the credit spread up to a more palatable 200 bps approximately, a trader said.

One source compared ExtraSpace's credit to that of competitor CubeSmart.

"They have a 4.8% coupon straight bond that trades at about 175 bps over Libor," a Connecticut-based trader said of Cube. "They both have similar leverage and CUBE is about half the size of ExtraSpace. So I guess 110 [bps] isn't that insane given that comp."

The terms were revised to a 2.375% coupon and 30% initial conversion premium, which was wider compared to initial talk at 1.5% to 2% for the coupon and 30% to 35% for the premium.

There was no gray market reported in the deal.

Extra Space shares were up by better than 50 cents, or 1.3%, at $42.84, which seemed tied to a "strong buy" rating upgrade on the space by Raymond James.

The better shares had no bearing on what investors were going to do to play the new deal, however, a buysider said.

The new paper is being issued by a subsidiary of Extra Space called Extra Space Storage LP.

The reason behind the structure is that the company is a REIT, a source said. "It's actually better for holders to be down at that level because that is the level at which the physical assets are held," he said, of the REIT convertible structured as an exchangeable.

The Rule 144A deal has an over-allotment option for a further $37.5 million of notes and was being sold via joint bookrunning managers Citigroup Global Markets Inc. and Wells Fargo Securities LLC.

Proceeds will be used to fund a previously announced acquisition, to repay outstanding debt under the company's secured lines of credit and for general corporate and working capital purposes.

The exchangeables will be non-callable until July 5, 2018. They are putable in years five, 10 and 15, on July 1 of 2018, 2023 and 2028.

There is contingent exchange at a trigger of 130%, as well as net share settlement.

The exchangeables have dividend protection for any dividends paid above $0.40 and takeover protection.

Weyerhaeuser to price

Weyerhaeuser, a timber company based in Federal Way, Wash., launched a registered, off-the-shelf deal that has a $75 million greenshoe and was being sold via Morgan Stanley & Co. LLC, Deutsche Bank Securities Inc., and Citigroup as joint bookrunning managers.

The series A preferreds have dividend protection at a quarterly dividend threshold of $0.22 and cash takeover protection.

They will automatically convert into a variable number of shares on July 1, 2016.

Proceeds will be used to finance its previously announced acquisition of Longview Timber LLC and for debt repayment.

Medivation slips with shares

Medivation's 2.62% convertibles due 2017 were seen in the market at around 125 versus an underlying share price of $47.00, according to a buyside source.

Medivation shares fell $3.64, or 7.2%, to $47.24 in heavy volume.

"There was a small hedge seller of MDVN early, but I haven't seen much since," the buysider said.

Medivation shares fell after Johnson & Johnson said it agreed to buy Aragon Pharmaceuticals for at least $650 million in cash and $350 million in potential milestone payments. Aragon's lead drug candidate is a potential treatment for prostate cancer, and one that is in direct competition with Medivation's Xtandi prostate drug.

Encore to price

Encore Capital plans to price $110 million of seven-year convertible senior notes after the market close Tuesday that were talked at a 3% to 3.5% coupon and a 25% to 30% initial conversion premium, according to market sources.

The Rule 144A offering has a $16.5 million greenshoe and was being sold via active bookrunners Morgan Stanley & Co. LLC and Barclays and passive bookrunners Citigroup, Deutsche Bank Securities Inc. and RBS Securities Inc.

The notes will be guaranteed on a senior unsecured basis by Midland Credit Management Inc., a subsidiary of the company.

Proceeds are expected to be used to pay the cost of capped call transactions and to pay a portion of the purchase price of a controlling interest in Cabot Holdings S.A.R.I. and for general corporate purposes.

In connection with the sale of the notes, the company plans to enter into capped call transactions with initial purchases of the notes or their affiliates.

Encore is a San Diego-based consumer accounts receivable management firm.

Mentioned in this article:

Encore Capital Group Inc. Nasdaq: ECPG

Extra Space Storage Inc. NYSE: EXR

Medivation Inc. Nasdaq: MDVN

ViroPharma Inc. Nasdaq: VPHM

Weyerhaeuser Co. NYSE: WY

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