Equity Residential starts higher; Macrovision ups deal amid strong gray market; PMC-Sierra up on filings

By Kenneth Lim

Boston, Aug. 17 - The convertible bond market saw activity pick up slightly on Thursday, with new deals dominating the scene.

Equity Residential's upsized $600 million of 20-year exchangeables enjoyed modest gains on their debut after the deal was priced off the cheap end of talk.

Meanwhile, Macrovision Corp. upsized its planned offering of five-year convertibles to $250 million and shifted priced talk toward the richer end of original guidance as the offering was bid higher by just over a point in the gray market.

PMC-Sierra Inc.'s convertible improved in line with the stock on Thursday after the company averted a technical default and filed its quarterly financials. The company also concluded its internal probe of past accounting practices related to its stock options and said that while it found errors in the dating of its options, the mistakes were not due to deliberate misconduct by employees.

Men's Wearhouse Inc.'s 3.125% convertible due 2023 jumped as much as 7 points outright and improved slightly on a dollar-neutral basis after the company beat estimates for its second-quarter earnings.

The convertible traded at 137 against a stock price of $37.59. Men's Wearhouse stock (NYSE: MW) climbed 9.25% or $3.21 to close at $37.93.

"They reported better-than-expected numbers," a buyside convertible bond trader said. "The bonds are up maybe a quarter-point or so [on a dollar-neutral basis)."

Houston-based Men's Wearhouse said late Wednesday that its second-quarter earnings surged 46% on lower costs to $35.6 million, or 65 cents per share, from the year-ago profit of $24.4 million, or 43 cents per share. The consensus on the Street was for 59 cents per share.

Men's Wearhouse, a retailer of business and casual clothes for men, expects a third-quarter net profit between 49 cents and 54 cents per share. For the full year, the company raised its forecast of net earnings to between $2.40 and $2.50 per share from the earlier guidance of $2.33 to $2.40 per share.

Equity Residential upsized, priced cheap

Equity Residential's newly priced 3.85% exchangeable due 2026 eked out a small gain on its first day of trading after the upsized deal was reoffered below earlier talk with the coupon and premium set at the cheap end of guidance.

The exchangeable, which was reoffered at 98.75, traded about 0.125 point higher on Thursday. Equity Residential stock (NYSE: EQR) slipped 0.84%, or 40 cents, to finish at $47.24.

"I think it was fairly priced," a buyside convertible bond trader said.

Equity Residential on Wednesday priced the $600 million deal with a coupon of 3.85% and an initial exchange premium of 28.04%. The notes were originally reoffered at 99.25 apiece. Price talk guided for a coupon of 3.6% to 3.85% and an initial exchange premium of 28% to 30%.

The size of the original deal was $500 million. The greenshoe for a further $50 million remains.

The notes will be issued by Equity Residential's subsidiary, ERP Operating LP, and exchangeable into common stock of Equity Residential.

Merrill Lynch was the bookrunner of the registered off-the-shelf offering.

Equity Residential said it will use the proceeds of the deal to pay down its outstanding revolving credit facilities. Equity Residential is a Chicago-based real estate investment trust that develops and operates apartment properties in the United States.

The buysider said the pricing was reasonable.

"I think Merrill did the right thing," the buysider said. "They upsized the deal, and they priced it at 98.75. It's a fair piece of paper at that level...As usual you'd like to see a better premium, but the company has rock-solid credit. It was fair."

A Connecticut-based convertible bond analyst said the company probably had little choice but to price the deal at the cheap end of talk, because the original terms left little on the table for investors.

"I was pretty tight on my credit spread assumption...and it got me a fair value right around 99.25," the analyst said.

At the final pricing, the deal was about 1% cheap, the analyst said.

"It's a good credit," the analyst said. "It didn't look very compelling on a hedge basis, but REIT bonds typically aren't, and there's a high yield on the common. Also, because it's such a good credit, it's got pretty good gamma. Probably when you slosh all that around, it comes out pretty reasonable."

A sellside analyst said the deal was just "standard REIT stuff." The analyst noted that convertibles are currently offering slightly lower financing costs for REITs, which have been rushing to take advantage of the lower costs with a spate of convertible deals recently.

Macrovision gains in the gray

Macrovision's upsized $250 million of five-year convertible senior notes were up about 1.25 points in the gray market on Thursday as the issuer shifted price talk toward the richer end of original guidance.

"I like it very much," a buysider said.

Price talk on the deal was changed to a coupon of 2.625% and an initial conversion premium between 30% and 32.5% on Thursday. The original price talk was for a coupon between 2.625% and 3.125% and an initial conversion premium between 25% and 30%.

The size of the deal was originally $175 million, with an over-allotment option for a further $25 million. There is no longer any greenshoe.

The convertibles were offered at par, and pricing was expected after the market closed.

JP Morgan was the bookrunner for the Rule 144A offering.

Macrovision is a Santa Clara, Calif.-based developer of anti-piracy solutions for software and other digital content. It will use the proceeds of the deal for general corporate purposes and to concurrently buy back up to $50 million of its own stock for convertible note hedge and warrant transactions.

Macrovision stock (Nasdaq: MVSN) retreated 3.27%, or 73 cents, to close at $21.59 on Thursday.

"It looks OK," a sellside convertible analyst said of the original price talk. "It's worth about 102.5 at the midpoint. The borrow is fine. There doesn't look to be anything overly negative about the company. It seems like a reasonably OK deal."

Macrovision's business does not really have straightforward comparisons when it comes to determining its credit spread, the analyst noted.

"They make anti-piracy stuff...so they're kind of like a media, TV, movie company; but what they really have is technology, right?" the analyst said. "It's kind of like a cross between a technology and a media company."

The analyst said the company's credit quality was fair, noting that they are free cashflow and EBITDA positive with about $100 million of cash on the balance sheet. "The stock hasn't performed all that great, but it seem OK," the analyst said.

The buysider said the price talk, even after it was changed, was attractive.

"It's probably got a better credit than people are giving it credit for," the buysider said. "It's a five-year duration, which I like, and they have positive cashflow."

PMC-Sierra climbs on filings

PMC-Sierra's 2.25% convertible due 2025 gained about 3 points outright with the stock on Thursday after the company averted a technical default by filing its quarterly financials. But the company also disclosed the extent of accounting errors related to its employee stock options, which observers say continues to be a concern.

The convertible was marked at 106.25 against a stock price of $6.70 on Thursday. PMC-Sierra stock (Nasdaq: PMCS) climbed 7.2%, or 44 cents, and closed at $6.55.

Santa Clara, Calif.-based PMC-Sierra on Wednesday reported results for the quarter ended July 2 within a five-day extension granted by the Securities and Exchange Commission.

The maker of telecommunications equipment also restated its balance sheets for 2005 with the conclusion of its audit committee's review of its stock option granting practices. PMC-Sierra said it made adjustments that will increase capital stock and paid-in capital and increase accumulated deficit on all balance sheets from December 2002, and the amount of adjustment within stockholders' equity was $89.6 million.

The company said there was no impact on its cash position or previously reported revenues. It added that the incorrect measurement dates of certain stock options grants that led to the adjustments were not due to "deliberate misconduct" by employees and directors.

"I guess it means they're not going to have a technical default," a sellside convertible bond analyst said.

The analyst said the stock has been weighed by concerns over the earlier resignation of PMC-Sierra's previous chief financial officer, which occurred as the company announced the investigations.

"Maybe this will help to free up the equity," the analyst said, adding: "But I don't know if it clears it up, if you say, 'Yeah, it happened, but it wasn't intentional.'"

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