Forest City gains modestly on debut; HRPT upsizes deal; United Dominion prices; Human Genome climbs

By Kenneth Lim

Boston, Oct. 5 - The convertible bond market continued to be dominated by new deals, although Forest City Enterprises Inc. failing to make much of a positive impact on its debut.

The property developer's newly priced 3.625% convertible due 2011 was seen just slightly above par on the back of gains in the common stock after the deal arrived at the cheap end of talk.

Meanwhile, HRPT Properties Trust's planned $330 million of convertible preferred stock was upsized and priced within talk as investors described the deal as easy to hedge.

United Dominion Realty Trust Inc.'s $250 million offering priced at the cheap end of talk, with observers describing the deal as just fair at the midpoint of marketing guidance.

Diodes Inc.'s planned $200 million deal was seen as cheap at the mid-point of price talk, but investors sounded a note of caution on the company's growth prospects and the high conversion premium.

Away from the primary market, Harrah's Entertainment Inc. was up slightly with the stock as the market continued to speculate about a private-equity buyout offer on the table. Harrah's floating-rate convertible due 2024 changed hands at 121.25 against a stock price of $75, about a point higher outright. Harrah's stock (NYSE: HET) rose 1.67% or $1.25 to close at $76.25.

"Harrah's improved slightly, mostly in line with the stock," a sellside convertible bond trader said. "On a dollar-neutral basis it's still way below what it was at the start of the week...I don't think it's going to get back to where it was. Now that there's an offer, someone else might show up with a better one. Or if management doesn't want to sell, they'll have to keep shareholders happy by thinking of something else, maybe a buyback."

Las Vegas-based Harrah's, a casino operator, on Monday received an $81 per share cash offer from two private equity firms. The company's board of directors has formed a committee to review the offer and appointed UBS as an adviser.

Human Genome Sciences Inc.'s 2.25% convertible due 2012 continued to improve a day after the drug maker reaffirmed its revenue guidance and signaled a slowdown in cash burn.

The convertible improved about a point outright, trading at 99 against a stock price of $12.875. Human Genome stock (Nasdaq: HGSI) closed at $12.73, up by 2.25% or 28 cents.

"Human Genome Sciences continued to see better bids after the company gave its guidance," a sellsider said.

Human Genome said Wednesday that it continues to expect $22 million in revenue for 2006, which would represent an improvement from the $19.1 million the year before. The company also expects 2006 net cash burn of $75 million to $125 million, down from the $237 million in 2005.

Forest City lackluster on debut

Forest City's new 3.625% convertible due 2011 was seen trading just slightly around par on Thursday after the deal priced at the cheap end of talk.

Each note, which is convertible into Forest City's class A common stock, was offered at par. Forest City class A stock (NYSE: FCE-A) improved 0.79% or 42 cents to close at $53.53.

"It wasn't really active," a sellside convertible bond trader said. "It was up a little, but the stock was also better."

Forest City priced its $250 million offering Wednesday after the market closed. The deal was talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 25% to 30%. The initial conversion premium was set at 25%.

There is a greenshoe option for a further $37.5 million.

Goldman Sachs was the bookrunner of the Rule 144A deal.

Forest City, a Cleveland-based real estate developer, said it will use the proceeds of the deal to fund note hedge and warrant transactions and to buy back up to $25 million of its class A common stock. It will also repay recourse debt outstanding under its $600 million revolving loan, and for general corporate purposes.

"This company's basically a REIT," a buysider said. "The pricing was fair, but it wasn't particularly interesting."

HRPT upsizes, prices deal

HRPT Properties upsized its offering of perpetual convertible preferred stock to $330 million and priced it within talk as investors described the deal as interesting and possibly easy to hedge.

The upsized $330 million of series D convertible preferred stock priced Thursday evening at a dividend of 6.5% and an initial conversion premium of 10.9%. The 13.2 million preferred shares were offered at par of $25 apiece, and were talked at a dividend of 6.25% to 6.75% and an initial conversion premium of 10% to 15%. HRPT common stock (NYSE: HRPT) slid 3.93% or 48 cents to close at $11.72 on Thursday.

The size of the deal was originally $250 million, or 10 million preferred shares. The over-allotment option was set at a further $49.5 million, or 1.98 million preferred shares.

Merrill Lynch and Banc of America Securities were the bookrunners of the registered deal.

HRPT, a Newton, Mass.-based real estate investment trust focusing on office and industrial real estate, said it will use the proceeds of the deal to reduce its outstanding revolving debt.

"HRP looks interesting," a buyside convertible bond trader said. "It's reasonably cheap, the coupon isn't great but it's OK and the credit is decent."

A sellside convertible bond analyst said the deal modeled about 2.5% to 3% cheap using a conservative credit spread.

"It probably isn't too bad as a hedge set up," the analyst said. "It's not a huge delta, even though the premium is low, and you can extract some cash flow on this thing depending on what your funding cost might be...and it's got an investment value that for a preferred could hold relatively well."

For outright investors, the convertible's attractiveness could go either way, the analyst said.

"It sets up as an outright idea, but you'd need to take a position on the stock, and that's kind of an open-ended question at this time," the analyst said.

The analyst noted that a preferred is "not everyone's cup of tea," and suggested that HRPT could have used this method of raising capital without levering further by issuing preferreds instead of notes.

United Dominion prices at cheap end

United Dominion priced its $250 million of five-year convertible senior notes at the cheap end of talk on Thursday, as observers panned the deal as yet another REIT deal.

The deal priced after the market closed with a coupon of 3.625% and an initial conversion premium of 20%, and was reoffered at 98.75. United Dominion stock (NYSE: UDR) closed at $31.29, up by 0.22% or 7 cents.

Price talk was for a coupon of 3.375% to 3.625% with an initial conversion premium of 20% and a reoffered price of 99.

There is a greenshoe option for a further $37.5 million.

JP Morgan, Merrill Lynch and Wachovia Securities are the bookrunners of the Rule 144A offering.

United Dominion, a Highlands Ranch, Colo.-based real estate investment trust that focuses on mid-market apartment communities, said it used $12.6 million of the proceeds of the deal to fund convertible note hedge and warrant transactions. It will also repay its debt under a revolving loan and fund general corporate purposes.

"The bookrunners may have trouble getting this one done," a buyside convertible bond trader said. "They're already reoffering it, but the terms still aren't that great. You can't tell this REIT from the rest."

Including United Dominion, Thursday saw three deals from real estate-related companies pricing, leading some observers to voice concern about market fatigue.

"The convertibles sector is being carpet-bombed with REITs," a sellside convertible analyst said. "All the new supply is coming on. You can't buy all of them, let's face it."

The sellsider said that if wave of new REIT paper continues, later deals may suffer from an oversupply.

"Volatility and implied vols are going to have to tick down a little bit to make room for all the supply," the sellsider said. "I think the psychology is, some people are starting to say, 'I'm not going to pay more than x implied vol for any REIT given all the supply in the market right now.'"

Diodes deal gets mixed reviews

Diodes Inc.'s planned $200 million offering of 20-year convertible senior notes was seen Thursday as cheap, but market sources sounded a note of caution given the company's growth prospects and the deal's premium.

The offering was talked at a coupon of 1.875% to 2.375% and an initial conversion premium of 32.5% to 37.5%, and expected to price Thursday after the market closed.

There is a greenshoe option for a further $30 million.

UBS Securities is the bookrunner of the registered off-the-shelf offering.

Diodes, a Westlake Village, Calif.-based semiconductor manufacturer, said the proceeds of the deal will be used for working capital and other general corporate purposes, including acquisitions.

"I thought that one was OK," a sellside convertible bond analyst said. "It looked like it was a little bit on the cheap side...but I was a little bit uncertain about how to view it as a convertible."

The sellsider said that with the low coupon and high premium, "it didn't look like it was terribly attractive to set up on a hedge." For outright investors, Diodes is "not the type of credit that's got a lot of gamma," and the downside protection was not great.

Another convertible analyst was also ambivalent about the deal.

"The credit looks OK, they have no real prior debt, the company is making money, positive EBITDA and cash flow," the analyst said. "But the concern is that they're in the business of discrete semiconductors, and that's a commodity product, and there are some very big players in that space."

Explaining that Diodes is the smallest player in a commodity sector battling semiconductor giants, "psychologically the premium may be too aggressive given the nature of their product."

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