Kilroy dips below par on debut, TRW trades at 101; deCODE off on bankruptcy; DryShips on tap

By Rebecca Melvin

New York, Nov. 17 - Two new convertibles that priced late Monday marked very lackluster debuts when they were released for secondary dealings on Tuesday, with Kilroy Realty LP's newly priced 4.25% convertibles falling below par to trade at about 99, market players said.

"I thought [Kilroy] would do well; but it didn't. Maybe it was something about the name or people are fatigued on deals," a New York-based sellside trader said, referring to the fact that Kilroy is a real estate investment trust with most of its assets concentrated in southern California, which has seen its real estate market hit hard by the recession.

The second new deal, this one from TRW Automotive Inc., did better. TRW's newly priced 3.5% convertibles traded up a point to 101 and held that level.

Back in established issues, deCODE Genetics Inc. convertibles fell in active trade after the Reykjavik, Iceland-based biopharmaceutical company filed for Chapter 11 bankruptcy to complete the sale of substantially all of its assets.

One sellsider said his firm was "swamped with deCODE."

But the convertibles of Saks Inc. were mostly quiet after the luxury retailer reported its first profit in six quarters and saw its shares rise 4%.

After the close of markets Tuesday, a new deal emerged. DryShips Inc. planned to price $300 million of five-year convertible notes after the close on Thursday that were talked to yield 4.5% to 5% with an initial conversion premium of 25% to 30%.

TRW trades 101

TRW Automotive's newly priced 3.5% convertibles due 2014 traded as high as 101 and were later seen at 100.875 bid, 101.375 offered.

"We've traded about $20 million here. But [it's] quiet in the name now," a New York-based sellside analyst said.

Shares of the Livonia, Mich., automotive supplier started the session lower but swung into positive territory in the afternoon and ended higher by $1.26, or nearly 6%, at $23.15. The move reversed a 4.7% loss on Monday.

"TRW is an improving credit story. It's sort of a macro story," a sellsider said.

It joins a growing coterie of auto/auto supplier names in the convertible universe that includes Johnson Controls, BorgWarner, Autolive, which did an acquisition of a piece of Delphi on Tuesday, and Ford Motor.

"There's activity there," the sellsider said, referring to the auto sector.

On Monday, TRW was quiet in the gray market, and it appeared that the Kilroy deal, which was seen as cheap, would be the favorite of the two new deals.

"It almost seemed that there wasn't much interest above the mids, and there was jawboning. People didn't like the amount of premium," the sellsider said.

There wasn't much interest in the deal at the midpoint of pricing, he said. And in fact it did come on the cheap end of talk.

"Once that happened, then you had some interest," the sellsider said.

The TRW paper priced with a 3.5% coupon and a 35% initial conversion premium, which compared to price talk of a 3% to 3.5% coupon and a 32.5% to 37.5% initial conversion premium.

The deal had less coupon and more premium than Liberty Global, which priced last Friday.

"Liberty Global did quite well, and mainly the difference was in the premium. That was 4.5% up 15%, and for arguably a better credit...arguably," the sellsider said.

"That one was brought on a Friday morning and everyone was given 45 seconds to put in for it, and there was no problem getting that done," the sellsider said.

Typically convertible deals aren't launched on Fridays. That deal was related to another transaction on the same day, but nevertheless, it seems that there are a lot of "things like that are changing a little bit," the sellsider said.

On Monday, Fitch Ratings upgraded its ratings on TRW for its cost cutting and better earnings expectations.

The ratings agency upgraded its issuer default rating on TRW one notch to B from B-, still keeping it within non-investment-grade territory.

Fitch also expects to rate TRW's new unsecured exchangeable notes CCC/RR6. Fitch said the upgrades reflect a "significant improvement" in TRW's credit profile following deep cost-cutting moves, a better auto production outlook and a recent equity offering.

The parts supplier, which makes chassis, safety and other automotive systems, was hit hard by the downturn in auto sales like other parts suppliers. But its fortunes have picked up recently as consumers start buying cars again and auto production restarts.

TRW intends to use about one-half of the net proceeds to repay borrowings under its existing term loan facilities, with remaining net proceeds for general corporate purposes, which may include additional repayment of debt.

Kilroy slips below par

Kilroy's newly priced 4.25% convertibles due 2014 were quoted at 98.75 bid, 99.25 offered, with trades seen at 99.125, according to market sources.

"The underwriter didn't even support it," a sellsider complained. Generally the underwriter will bid at issue for a new issue at least for a while to help customers out, he said.

Investors may have shied away from the paper from a credit perspective, given that the REIT has its activities in southern California, concentrated between Los Angeles and San Diego.

"That was the worst thing about it. The terms looked pretty attractive. Given its low premium, I thought it would do well," the sellsider said.

Shares of Los Angeles-based Kilroy were down a little, settling 24 cents lower, or 0.78%, at $30.34.

The Kilroy convertibles were priced to yield 4.25% with an initial conversion premium of 17.5%. They came to market at the cheap end of talk, which was 3.75% to 4.25% for the coupon with an initial conversion premium of 17.5% to 22.5%.

deCODE falls

DeCODE's two series of 3.5% convertibles due 2011traded lower on Tuesday to about 8 but they also traded at 14, from about 15.50.

Both the new and old looked to have similar pricing although the older paper doesn't have takeover protection and the new one does, a Connecticut-based sellside analyst said. But the old one is senior, and the new one is not senior.

"I've been saying that they were likely to go bankrupt for two or three years. They were burning more cash than they were bringing in, and I didn't know where they were going to get financing from," the analyst said.

deCODE said that it has explored multiple restructuring alternatives in recent months, according to a news release, including the sale of specific portions of deCODE's operations, the sale or license of its drug discovery programs, the restructuring of its outstanding convertible notes and the obtaining of new equity financing.

As a result of these efforts, the company said it has entered into an asset purchase agreement with Saga Investments LLC to sell its Iceland-based subsidiary Islensk Erfdagreining and its drug discovery and development programs.

Saga was formed in September by Polaris Venture Partners and ARCH Venture Partners for the express purposes of purchasing the deCODE assets.

The agreement is subject to a competitive bidding process and court approval.

The purchase price under the stalking horse agreement is comprised of three components, including a base cash price equal to the greater of $11 million or a Saga debtor-in-possession loan amount. A minimum of $3 million of the base cash price must be paid in cash.

The second component is an additional cash price consisting of 25% of the net cash proceeds from the sale, license or other monetization of the purchased compounds received within 24 months of the closing date, minus $3 million.

The third component is a non-cash price consisting of non-voting junior convertible non-redeemable preferred membership interests in Saga with a non-participating liquidation preference of $7.15 million.

Based on the DIP loan amount, the company said it projects a closing date consideration of $14.12 million, including refinancing of a bridge loan in full plus $3 million in cash.

Mentioned in this article:

deCODE Genetics Inc. Nasdaq: DCGN

DryShips Inc. Nasdaq: DRYS

Kilroy Realty LP NYSE: KRC

TRW Automotive Inc. NYSE: TRW

Saks Inc. NYSE: SKS

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