Kyphon, Boston Properties gain, U.S. Bancorp eases on debuts; Sunpower, Trico quiet, Borland up in gray

By Kenneth Lim

Boston, Feb. 1 - Fresh paper dominated the convertible market on Thursday, with Kyphon Inc.'s gains leading the newcomers after its offering priced within talk.

U.S. Bancorp's $3 billion was flat to slightly lower, after the deal's structure drew limited interest and was reoffered below initial talk.

Boston Properties Inc. advanced as well, after its new exchangeables were reoffered at the cheap end of guidance amid a lack of excitement over its offering.

In the gray market, Borland Software Corp. attracted positive bids. Although the Street had trouble pinning spread and volatility assumptions on the deal, analysts nevertheless agreed that it appeared cheap.

Sunpower Corp. and Trico Marine Services Inc. were quiet in the gray market amid initial concerns about the ability to borrow stock in either name, although both deals were seen as fairly attractive.

Kyphon opens higher

Kyphon's new 1% convertible due 2012 and 1.25% convertible due 2014 gained more than a point over par in their secondary market debuts on Thursday, with the deals pricing within talk.

The 1% convertible traded at 101.9 against a stock price of $47, while the 1.25% convertible changed hands at 101.25 versus a stock price of $46.75. The convertibles were offered at par. Kyphon stock (Nasdaq: KYPH) closed at $45.93, lower by 2.07% or 97 cents.

"The Kyphons were good," a sellside convertible trader said. "They traded up at the start and faded off towards the afternoon."

Kyphon priced the convertible senior notes in two $175 million tranches on Wednesday after the market closed, with an initial conversion premium of 24%. The five-year notes were talked at a coupon of 0.75% to 1.25%, while the seven-year series was talked at a coupon of 1% to 1.5%. The initial conversion premium was talked at 20% to 25%.

Each tranche has an over-allotment option for a further $25 million.

Goldman Sachs, JP Morgan and Banc of America were the bookrunners of the Rule 144A offering.

Kyphon, a Sunnyvale, Calif.-based maker of spinal medical devices, said it will use the proceeds of the offering to retire $310 million of a $425 million senior syndicated bank term loan that it used to buy St. Francis Medical Technologies. It will also use the proceeds to fund convertible hedge and warrant transactions.

"Kyphon was modeling modestly cheap, maybe half a point to a full point cheap," a sellside convertible analyst said. "I guess they did pretty decent."

U.S. Bancorp draws limited interest

U.S. Bancorp's new Libor minus 175 basis points convertible senior debentures due 2037 was flat to about 1/8 point below its reoffered price on its debut, as the deal's structure found only limited interest.

The convertible traded at 98.75 against a stock price of $35.50 on Thursday. The new convertible was reoffered at 98.875.

U.S. Bancorp's older three-month Libor minus 175 bps senior debentures due 2036 slipped about ¼ point to 100.25 against the same stock price. U.S. Bancorp stock (NYSE: USB) ended Thursday at $35.59, lower by 0.03% or 1 cent.

The debentures were talked with the same coupon and conversion premium and reoffered between 99 and 99.125.

There is an over-allotment option for an additional $450 million.

Deutsche Bank was the bookrunner of the overnight Rule 144A offering.

U.S. Bancorp, a Minneapolis-based bank, said it will use the proceeds of the deal to concurrently buy back up to 14 million shares of its common stock and for general purposes.

A sellside convertible analyst said the deal's short structure provided a "way to park capital for a little while."

"It's only a one-year put, so you can't get hurt too badly," the analyst said. "You're not going to get hurt if rates fall, and you're kind of protected either way."

Another convertible analyst said the deal modeled fair at about 99, but called it "just as uninteresting as the last one they did." U.S. Bancorp has offered four convertible series with similar structures.

"The first two that they did were more interesting because at the time volatility in U.S. Bancorp was higher and thus asset swapping was more profitable," the second analyst said. "The last two deals, you're basically buying a one-year cash-to-put surrogate. The stub that you're left with is basically more than what the option is worth."

A sellside convertible trader said the offering did not appeal to most convertible traders.

"Who cares about stuff like that, when you think about it. Seriously," the trader said. "It's like sleeping with your ugly cousin."

Boston Properties rises on debut

Boston Properties' new 2.875% exchangeable senior note due 2037 rose just over ½ point outright on Thursday after its offering was reoffered at the cheap end of talk.

The exchangeable traded at 98.375 versus a stock price of $123.50, gaining over its reoffered price of 97.75. Boston Properties stock (NYSE: BXP) closed unchanged at $126.09.

The $750 million overnight offering priced Thursday before the market opened with an initial conversion premium of 20%. The reoffered between 97.75 and 98 during price talk, with the coupon and conversion premium already set.

The notes are issued by Boston Properties LP, a subsidiary of the listed company. They are exchangeable into Boston Properties Inc. common stock.

There is an over-allotment option for a further $112.5 million.

JP Morgan and Morgan Stanley were the bookrunners of the overnight Rule 144A offering.

Boston Properties, a Boston-based real estate investment trust focusing on office properties, said the proceeds will be used for general purposes, including repayment of debt, development opportunities, asset acquisition and other future investment opportunities.

A sellside convertible analyst said the offering modeled just slightly more than 1% cheap where it priced. Another analyst said the deal modeled about fair, and expected it to arrive near the cheap end.

"I would expect it to come at the cheap end of the reoffer range, not because there's anything wrong with Boston Properties, but just because there's been such a flood of that kind of [REIT] paper, now I think you really have to entice investors, to go after them a little bit," the analyst said.

Borland rises in gray

Borland's planned $125 million of five-year convertible senior notes was bid ½ to 1½ points higher in the gray market on Thursday ahead of pricing expected after the market closed.

"It makes them about 3% cheap, which is pretty good for this market," a convertible analyst said.

Borland's deal was talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 20% to 25%. Borland stock (Nasdaq: BORL) dropped 6.59% or 36 cents to close at $5.10 on Thursday.

The notes were offered at par.

There is an over-allotment option for a further $15 million.

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

Borland, a Cupertino, Calif.-based developer of application lifecycle management software, said it will use the proceeds to buy back about $25 million of its common stock and for general purposes, including potential acquisitions.

Two convertible analysts said they had the deal modeled about 3% cheap, although their credit spread and volatility assumptions were significantly different.

"It's a small software company, and typically software companies don't have debt, so just to find comparable companies is tough," one of the analysts said, explaining the difficulties of modeling the deal.

The second analyst, who used a tighter spread, said Borland was probably less risky than it appears at first glance.

"You have to take a little bit of a leap of faith in the next couple of quarters, but there's still time for them to work things out," the analyst said. "If you looked at some of the other comparables it would put Borland at the low end of quality, certainly, but with no debt except for a five-year convertible that's coming at a pretty low premium and with a turnaround in play, it's not a high risk credit right now."

Sunpower quiet in the gray

Sunpower's planned $130 million of 20-year convertible senior unsecured notes was quiet in the gray market on Thursday, with the deal expected to end up with a small number of investors.

The offering was talked at a coupon of 1.25% to 1.75%, and an initial conversion premium of 25% to 30%, and the notes were offered at par. Sunpower stock (Nasdaq: SPWR) rose 0.47% or 21 cents to close at $44.51.

There is an over-allotment option for a further $19.5 million.

Lehman Brothers and Credit Suisse are the bookrunners of the registered off-the-shelf offering.

Sunpower is concurrently lending an unspecified number of shares of its common stock for a separate stock offering that will be used for a stock borrow facility.

Sunpower, a San Jose, Calif.-based maker of solar electric power products, said the proceeds of the deal will be used for general purposes.

A sellside convertible strategist said the company appeared to be slightly cheap using a credit spread of around 250 basis points over Libor and a credit spread in the mid-30% region, but acknowledged that others may apply a tighter spread.

"To get there [a tighter spread] you do have to believe some of the estimates that are out there for this company," the strategist said. "But for now I think it's more of a 250 credit...I would assume people are using a tighter credit spread partly because of the solar energy hype. I have a feeling that probably outright interest in the name would help drive up interest in the deal."

Another convertible analyst said Sunpower appeared to be "a great credit," and had a strong outlook. The key concerns were the usual risks involved in being in a growth industry and the possibility of mergers and acquisitions, the analyst said.

"It's a great credit, there's not a problem there," the analyst said. "But they may have pretty heavy capex levels the next couple of years, with factory expansion in the Philippines. But it's a growth industry, it's very fragmented and these guys have a real competitive position. The things they're making tends to be a bit of a commodity, but they have a differentiated product that's more aesthetically pleasing and more efficient."

Trico sees early borrow concerns

Trico Marine's planned $125 million of 20-year convertible senior debentures were also quiet in the gray market, but the deal was seen as slightly attractive although there were early concerns about the stock borrow.

Trico's deal, which was expected to price after the market closed, was talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 35% to 40%. The convertibles were offered at par. Trico stock (Nasdaq: TRMA) closed at $31.25, lower by 3.93% or $1.28.

There is an over-allotment option for a further $25 million.

Lehman Brothers was the bookrunner of the Rule 144A offering.

Trico, a Houston-based provider of marine support vessels for the oil and gas industry, said the proceeds of the deal will be used for general purposes, which may include pursuing opportunities in emerging markets, increasing its fleet renewal program and making strategic acquisitions.

"They only have about 14 million shares outstanding," a sellside convertible trader said. "I would think that there might be some problems with the borrow."

A sellside convertible analyst said the stock borrow actually seemed to be fine early Thursday, but came slightly off top-rate later in the day as demand for the borrow increased.

"It's not top-rate now, but I don't think it's that big of a problem," the analyst said.

The analyst said Trico's offering modeled just over 1% cheap, but there was "potential for higher volatility."

"It's got very low leverage and good potential for future volatility," the analyst said. "Hedge or outright, it looks pretty good, but I wouldn't say they set up great. They set up with a slightly negative carry, and in both outright and hedge the trade off isn't as good as you'd like."

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