Cypress falls on dashed hopes; Barnes climbs on results; Minefinders strikes gold; Home Properties gains

By Kenneth Lim

Boston, Oct. 19 - The convertible bond market continued to be active on Thursday, with Cypress Semiconductor Corp. tumbling several points outright after the company said it will not pursue a buyout.

Barnes Group Inc. gained in line with its stock on the back of strong third-quarter results and improved 2006 guidance.

Minefinders Corp.'s newly priced offering had a strong debut, climbing about 6 points outright amid strong interest in what was described as a cheap deal.

Home Properties Inc.'s deal also gained on its first day of trading, but interest was muted as investors were relatively unexcited by yet another real estate investment trust deal.

The secondary convertible bond market in general appeared slightly weaker. Speculation emerged Thursday that a large offering may be in the works in the primary market.

"The rumor I heard is there's a real big deal coming," a buysider said. "Nobody knows who the deal is, and no one's confirmed this."

Cypress falls with buyout hopes

Cypress' 1.25% convertible due 2008 fell about 17 points outright on Thursday after the company said it will not be selling itself.

The convertible traded at 123 against a stock price of $16.55 on Thursday, while Cypress stock (NYSE: CY) dropped 11.23% or $2.13 to close at $16.84. While the convertible was lower outright, hedged investors may have walked through the fallout unharmed.

"There was some nice gamma trading there," a buyside convertible bond trader said. "If you were on a market hedge you did fine."

San Jose, Calif.-based Cypress said it had decided not to pursue a buyout, following its Oct. 6 decision to review its strategic options. That earlier decision sent the stock rallying on speculation that the company could be the target of a leveraged buyout, similar to the recent sale of Freescale Semiconductor Inc.

Cypress, a semiconductor manufacturer, said Thursday that it will continue to seek ways to let shareholders fully realize the value of the company and its investment in recently listed SunPower Corp.

Cypress also reported third-quarter net profit of $10.7 million, or 6 cents per share, up from the year-ago loss of $5.9 million, or 4 cents per share.

"That [decision to stay independent] doesn't mean anything," a sellside convertible analyst said. "I still think that just because the company says it's considering selling itself doesn't mean it can find a buyer...The stock was down, but I don't think it should ever have rallied."

The analyst said Cypress has been trying to monetize its SunPower stake, "which is a huge asset for them," and its recent review most likely focused on that. Investors likely got carried away hoping for a buyout because of recent leveraged buyouts of Freescale and Harrah's Entertainment Inc.

"After the Freescale Semiconductor LBO people started looking at Cypress as a possible candidate," the analyst said.

The Cypress convertible was lower outright, but on a dollar-neutral basis the security was probably unharmed, the analyst said.

"The bonds are so deep in the money it doesn't really matter," the analyst said.

Barnes gains on results

Barnes' 3.75% convertible due 2025 rose about 8 points outright on Thursday after the company beat Street estimates for its third quarter and raised its forecast for the year.

The convertible traded at 116.375 against a stock price of $20.90. Barnes stock (NYSE: B) closed at $20.91, up by 14.58% or $2.66.

"They were a little better today," a convertible bond trader said.

Barnes on Thursday reported third-quarter net profit of $18.9 million, or 35 cents per share, from $15.4 million, or 31 cents per share, in the year-ago period. Barnes also raised its earnings estimates for 2006, to between $1.33 and $1.35 per share, from the earlier guidance for between $1.28 and $1.33 per share. Analysts were expecting $1.30 per share for the year.

"It was obviously a good quarter for them, and it looks like management is confident about the rest of the year," a sellside convertible trader said. "The stock's up, bonds are doing better."

Minefinders shines on debut

Minefinders' newly priced 4.5% convertible due 2011 turned out to be a goldmine for investors who got a piece of the deal, climbing about 6 points outright on the back of strong interest.

The convertible was 106 bid with the stock at $8.15 on Thursday. Minefinders stock (Amex: MFN) rose 2% or 16 cents to close at $8.16. The note was offered at par.

"It went off the charts," a buysider said. "It was priced appropriately."

Vancouver-based Minefinders priced its $75 million offering on Wednesday after the market closed, at a coupon of 4.5% and an initial conversion premium of 36%. Price talk was for a coupon of 4% to 4.5% and an initial conversion premium of 26% to 32%.

There is an over-allotment option for a further $10 million.

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

Minefinders, a precious metals exploration company, said the proceeds of the deal will be used to build and set up its proposed Dolores gold and silver mine in Mexico.

"We were very conservative," a sellsider said in explaining that the convertible modeled about 2.5% cheap at the mid-point of talk. "They have no revenues, right? Although they don't appear to be located in any politically sensitive country like some of the other mining companies."

Some investors saw Minefinders' early-stage development as potential for upside.

"It is kind of exploratory financing," a convertible bond analyst said. "That being said, looking at a couple of analysts who follow it, it could contribute to earnings from '07, and there are proven reserves."

The analyst also noted that hedged investors also enjoyed a stock borrow rebate that, while not top-rate, was reasonably cheap.

"The big thing for arb, too, is that there are no borrow issues," the analyst said. "The borrow is a little additional rate, only an additional 15 basis points."

Home Properties improves

Home Properties' new 4.125% exchangeable senior note due 2026 also gained slightly on its debut, although interest was more muted than that in the Minefinders deal.

The convertible was quoted at 100.25 bid, 100.375 offered against a stock price of $62.15 on Thursday. Home Properties stock (NYSE: HME) ended at $62.23, up by 0.13% or 8 cents.

"They priced it on the cheap end, which is what they had to do," a buysider said.

Home Properties on Wednesday priced the $175 million offering at a coupon of 4.125% and an initial exchange premium of 18%. The exchangeables, which were offered at par, were talked at a coupon of 3.875% to 4.125% and an initial exchange premium of 18% to 22%.

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

Merrill Lynch is the bookrunner of the Rule 144A offering.

Home Properties, a Rochester, N.Y.-based real estate investment trust that focuses on residential apartment communities in the United States, said it will use about $58 million of the proceeds to concurrently buy back stock, and another $70 million to repay an outstanding revolving loan. The rest of the proceeds will be used for general corporate purposes.

A sellside convertible bond analyst said the deal was just under a point cheap at the mid-point of talk.

"There's no yield advantage, and it's a low volatility name," the analyst said.

Also working against the deal was the fact that it is just the latest in a recent wave of REIT offerings, the analyst said.

"It's yet another REIT," the analyst said. "The whole market is so cluttered with them right now."

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