Discounted Extra Space edges higher outright; planned Weyerhaeuser praised; Encore slips

By Rebecca Melvin

New York, June 18 - Extra Space Storage Inc.'s newly priced 2.375% exchangeables traded up a little bit Tuesday on their debut in the secondary market after the $250 million of five-year convertibles priced beyond the cheap end of initial talk and at a discount to par at 98.5.

"In the end, it came at a decent price," a syndicate source said, and the issue traded almost completely on an outright basis.

Weyerhaeuser Co.'s planned $500 million of mandatory convertible preferred shares were in focus, with expectations growing that the deal would perform Wednesday in the secondary market after terms expected to be fixed late Tuesday.

The registered deal was seen slightly cheap, and given that there is no other paper in this space to speak of in the convert market, it was expected to do well. Weyerhaeuser is a forest products company and builds homes.

"I wouldn't be surprised if it is a very active name in the next few days," a trader said of Weyerhaeuser.

Encore Capital Group Inc. was also in the market with a $110 million offering of seven-year convertible senior notes.

Encore's existing 3% convertibles due 2017 were seen lower, or "in" a little bit at 128.75 bid, 129.75 offered, which was down by 0.25 point to 0.5 point, a trader said.

Encore is a San Diego-based consumer accounts receivable management firm. The 3% convertible was a $115 million deal that priced last November.

Also in the primary market, SolarCity Corp. announced a $175 million offering of five-year convertible senior notes ahead of the market open that was coming concurrently with a borrowed share offering. Timing and talk on the deal were not heard, and market sources suspected that the deal was getting done among select investors.

Both the SolarCity notes and borrowed shares offerings were being marketed through Goldman Sachs & Co., Credit Suisse Securities (USA) LLC and BofA Merrill Lynch.

Market players were focused primarily on new issues, and the secondary market remained notably quiet for a second day this week amid ongoing strength in the equity markets.

Extra Space edges higher

Extra Space's 2.375% convertibles traded at 98.625 bid, 99.125 offered on an outright basis. They were steady in that context during the session and didn't trade on swap, a syndicate source said.

The convertibles were up a little from their reoffer price of 98.5. Extra Space shares also strengthened during the session, closing higher by 86 cents, or 2%, at $43.70.

The company priced $250 million of 20-year exchangeable senior notes after the market close Monday at a discount to par, or 98.5, and with a 2.375% coupon and a 30% initial conversion premium.

The Extra Space deal was very similar in structure and pricing to NorthStar Realty Finance Corp.'s $300 million of 5.375% exchangeables that came on Friday also at a 98.5 discount. That deal was also pretty quiet in the secondary market.

Pricing came at revised talk, but beyond the cheap end of initial talk, which was for a 1.5% to 2% coupon and a 30% to 35% premium.

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

Proceeds will be used to fund a previously announced acquisition and 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.

The securities will be net share settled and have contingent exchange at a 130% price trigger. They also have dividend protection for any dividends paid above $0.40 and takeover protection.

Extra Space is a Salt Lake City-based real estate investment trust focused on self-storage facilities.

Planned Weyerhaeuser praised

Weyerhaeuser's registered, off-the-shelf deal of $500 million mandatories was looking a little bit cheap, according to a market source.

Using a credit spread of 75 basis points over Libor and vol. of 31% and 28%, the deal looks about 1.25% cheap at the midpoint of talk.

"The 1.25% cheap is kind of on the boring side, but coming with a stock deal helps it trade a little bit better," a New York-based trader said.

The trader also said that its sector was favorable, providing opportunity for convert players to have exposure in the timber/housing space.

"We think that will be positive in terms of the deal richening. There is currently nothing outstanding in the convert market in this space, except for Rayonier, which is the same industry, but fairly boring," the trader said.

As for the deal's structure, it is similar to the recent Dominion deal, but with only a single tranche.

The deal 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 convertibles 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.

"Outrights will eat this up," a trader said.

The Federal Way, Wash., timber company will use the proceeds to finance its previously announced acquisition of Longview Timber LLC and for debt repayment.

In addition, the series A preferreds have dividend protection at a quarterly dividend threshold of $0.22 and cash takeover protection.

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

SolarCity to price

San Mateo, Calif.-based SolarCity is a provider of clean distributed energy and announced a registered deal for $175 million of convertibles.

Timing and price talk were not heard, and one source said that the deal was probably getting done "over the wall," or with potential investors getting an inside look at the company's finances but conditional on the signing of non-disclosure agreements.

One trader said that the company's story is "interesting." It's an outfit that installs and maintains solar power systems of residential and commercial buildings in exchange for their tax credits, he said.

The deal is coming together with a borrow facility. The company plans to lend up to 2.8 million shares of common stock to Goldman Sachs Financial Markets LP under the share lending agreement. The company will receive no proceeds from the borrowed shares offering.

Proceeds are intended for general corporate purposes, which includes working capital, capital expenditures, potential acquisitions and strategic transactions.

Mentioned in this article:

Encore Capital Group Inc. Nasdaq: ECPG

Extra Space Storage Inc. NYSE: EXR

NorthStar Realty Finance Corp. NYSE: NRF

SolarCity Corp. Nasdaq: SCTY

Weyerhaeuser Co. NYSE: WY

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