REIT convertibles gain on volatility; Lucent gains on report, support for merger; Casual Male corrects

By Kenneth Lim

Boston, Aug. 24 - Volume in the convertible bond market continued to be light on Thursday, but real estate investment trusts saw a decent amount of action as investors sought volatility plays.

Lucent Technologies Inc.'s convertibles improved on the back of a positive note by Lehman Brothers and news that proxy advisory firm Institutional Shareholder Services Inc. was supporting the company's acquisition by Alcatel.

Casual Male Retail Group Inc. declined on concerns of a correction as the stock hovered near a five-year high.

The convertible bond market saw another quiet end-of-summer session.

"It's a very slow day," a sellside convertible bond trader said. "This past week or two has just been awful...For the most part people seem to be unresponsive to good bids and good offers. It looks like most people are out."

A buyside trader said the lack of activity was par for the course this time of year.

"It's the last weeks of August, that's how it is," the buysider said.

REITs active on volatility

Convertibles of real estate investment trusts were actively traded on Thursday, with Equity Residential, Equity Office Properties Trust and Archstone-Smith Trust gaining as investors sought out volatility plays.

Equity Residential's recently priced 3.85% convertible due 2026 was higher outright at 99.625 bid, 99.875 offered versus a stock price of $48.50. Equity Residential stock (NYSE: EQR) closed at $48.73, up by 0.79% or 38 cents. Equity Residential is a Chicago-based developer of apartment properties.

Equity Office's 4% convertible due 2026 improved slightly on a dollar-neutral basis, and was quoted at 103.07 bid, 103.19 offered against a $37.04 stock price. Shares of Equity Office (NYSE: EOP), a Chicago-based office property developer, declined 0.16% or 6 cents to close at $36.98.

Archstone-Smith's 4% convertible due 2011 was about 1.5 points higher outright at 102.875 bid, 103 offered versus a stock price of $52.59. Archstone-Smith stock (NYSE: ASN) added 0.74% or 39 cents and ended at $52.98 on Thursday.

"A fair amount of REIT papers traded," a convertible bond trader said. "They were all up."

The trader said there was no specific piece of news driving those trades. Rather, investors seemed to be chasing up the flavor of the month.

"People are buying the REIT volatility," the trader said.

Lucent gains on merger hopes

Lucent's 2.75% convertibles due 2025 were better on Thursday as a planned takeover by Alcatel received the support of a prominent shareholder advisory firm and the securities received positive reviews by Lehman Brothers.

The convertible gained about 1.5 points outright on Thursday, trading at 93.75 against a stock price of $2.22. Lucent stock (NYSE: LU) closed at $2.21, a drop of 0.45% or 1 cent.

Proxy advisory firm Institutional Shareholder Services on Thursday lent its support to Lucent's planned $10.4 billion all-stock acquisition by Alcatel, asking Lucent shareholders to approve the deal.

Also on Thursday, Lehman Brothers analyst Venu Krishna said in a report that all but one series of Lucent's outstanding convertibles - the 8% convertible due 2031 - look attractive with the merger likely to go through.

The current risk arbitrage trading spread between Lucent and Alcatel suggests a high 85% probability that the deal will go through, Krishna wrote. Factoring in the strong bids for volatility in European markets, convertible investors in the Lucent 2.75% convertibles due 2023 and 2025 will benefit if the current volatility spread differentials narrow, the analyst said.

Lucent's 7.75% convertible preferred, meanwhile, is an attractive yield-to-call play.

"Assuming the...merger goes through, we continue to believe that the likelihood of a call remains high and thus the 7.75% preferred remains an attractive investment alternative to the two LU 2.75% converts," Krishna wrote.

The 8.1% convertible, however, "should be avoided despite the high coupon and despite a reasonably attractive 7.3% YTP [yield to put]," the analyst wrote. The 8.1% paper may be put in August 2007.

"The LU 8s are currently callable at par (100%) and call risk is high in our view given that a majority of the issue has already been retired," Krishna wrote.

Casual Male

Casual Male Retail Group's 5% convertible due 2024 slipped about 2 points outright on Thursday amid a modest decline in the stock, which nevertheless remains near its five-year high.

The convertible was 113.125 bid, 114.125 offered against a stock price of $11.30 on Thursday. Casual Male stock (Nasdaq: CMRG) closed at $11.35, a loss of 0.79% or 9 cents.

A sellside convertible bond trader said the change was mostly a reaction to the stock's recent run up, which has some investors now betting on a slide in the share price. Casual Male is a Canton, Mass.-based retailer of large-sized men's apparel.

"The bond's callable in about four months, and there's very little premium right now," the trader said. "The stock is very expensive, it's been on a run up forever, and people are expecting it to come back down at some point."

Rite Aid shrugs off acquisition

Rite Aid's lightly traded convertibles were unmoved after the company said it plans to buy the Eckerd and Brooks pharmacy retail operations for $2.55 billion in cash and stock as well as the assumption of $850 million of debt.

Rite Aid's 4.75% convertible due December 2006, and its 5.5% and 7% mandatory convertible preferreds were quiet on Thursday despite a widening of the company's straight debt. Rite Aid stock (NYSE: RAD) fell 6.84% or 32 cents to close at $4.36.

"The 4.75s are trading to maturity, so the stock doesn't matter," a sellsider said. "I don't know if anyone trades the preferreds much."

Camp Hill, Pa.-based Rite Aid, a drugstore operator, said on Thursday that it plans to pay Canada's Jean Coutu Group $1.45 billion in cash, 250 million shares of Rite Aid common stock and assume $850 million of the company's long-term debt for the drugstores.

Standard and Poor's and Fitch Ratings on Thursday said they may cut Rite Aid's credit rating, citing the increased financial risks of integrating the acquired stores.

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