RF Micro, St. Mary, Eddie Bauer gain in gray; Strategic Hotels quiet; Ambassadors improves on debut

By Kenneth Lim

Boston, March 29 - New issues continued to capture the attention of convertible players on Thursday, with most of them moving up in the gray market ahead of pricing.

RF Micro Devices Inc. was bid higher in the gray, with the deal seen as cheap even as the company's stock tumbled on a warning of lower sales.

St. Mary Land & Exploration Co. also got better looks as investors said the deal's generous coupon was enough to offset the unusually high initial conversion premium.

Eddie Bauer Holdings Inc. drew better bids despite concerns about the stock borrow rebate, although the deal was expected to land with a limited number of investors.

Strategic Hotels & Resorts Inc. stayed quiet. Critics panned the offering's low coupon and a possible glut of real estate investment trust issues.

Newly priced Ambassadors International Inc. made a positive debut, riding a climbing stock despite limited allocations.

The secondary market continued to be soft with eyes mostly turned to the strong pipeline of new deals.

"There's not a lot going on outside of these new deals," a convertible trader said. "It probably won't pick up again until next week with the new quarter."

A sellside convertible analyst said even the four new deals expected to price Thursday after the market closed seemed only modestly interesting.

"All the ones that are here, they're all fairly aggressively pricing," the analyst said. "It would seem to me nothing's screaming cheap that is slated to price. Most of these are worth less than 101."

RF Micro up despite warning

RF Micro's upsized $350 million two-tranche offering of five- and seven-year convertible subordinated notes was at 100.25 bid in the gray market on Thursday as its stock dived on a sales warning.

The RF Micro deals priced after the market closed at the rich end of talk. The $175 million five-year series was set at a coupon of 0.75% while the equally sized seven-year tranche was set at a coupon of 1%. The initial conversion premium for both was fixed at 27.5%.

The five-year notes were talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 22.5% to 27.5%. The seven-year paper was talked at a coupon of 1% to 1.5% and the same initial conversion premium range.

The notes were offered at par. RF Micro stock (Nasdaq: RFMD) closed at $6.31, down by 10.75% or 76 cents.

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

Merrill Lynch was the bookrunner for the Rule 144A offering.

RF Micro Devices, a Greensboro, N.C.-based maker of radio frequency components, said the proceeds of the deal will be used for general purposes, which include working capital, potential acquisitions and future stock repurchases.

"It looks OK," a sellside convertible analyst said. "I think that [five-year] As are probably OK at the mids but the Bs are probably going to come closer to the cheap end. It's just how it models out."

But a convertible trader said the deal saw better interest because of the stock's downturn on Thursday.

"The stock was down by a lot today," the trader said. "They can probably put the highest conversion premium on the convertibles and because the stock's down so much today, it's still going to look OK."

St. Mary improves in gray

St. Mary's planned $250 million of 20-year convertible senior notes was at 100.25 bid, 101 offered in the gray market on Thursday as analysts said the deal's high coupon was enough to offset the expected high initial conversion premium.

The deal was talked at a coupon of 3.5% to 4% and an initial conversion premium of 47.5% to 52.5%. The notes will be offered at par. St. Mary stock (NYSE: SM) slipped 3.64% or $1.39 to close at $36.77.

There is an over-allotment option for a further $37.5 million.

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

St. Mary, a Denver-based oil and gas exploration company, said the proceeds of the deal will be used to repay outstanding revolving debt.

"I don't really care what the premium is," a convertible bond analyst said. "They could have brought this thing at 2s, up 30 if they wanted to. You could have a high premium, but you better have a high coupon to go with it. And they do have a decent coupon."

The analyst said the deal modeled just shy of 101 at the mids using a volatility in the high 20% range and a credit assumption in the mid-100 basis points over Libor region, noting that land-drilling companies like St. Mary are usually riskier.

Another convertible analyst had the deal about 1% cheap at the midpoint of talk using comparable assumptions. But the second analyst did not "find the whole thing attractive."

"I'm not sure I see the stock upside for the outright guys," the analyst said. "The participation isn't all that great, and it doesn't set up so well if you're hedged."

Eddie Bauer borrow a wild card

Eddie Bauer's planned $75 million of seven-year convertible senior notes was at 101.75 bid in the gray market, although allocations were expected to be limited and the stock borrow was questionable.

Eddie Bauer's deal was talked at a coupon of 5.5% to 6% and an initial conversion premium of 20% to 25%. Eddie Bauer stock (Nasdaq: EBHI) closed at $11.02, up by 0.92% or 10 cents.

The convertibles were offered at par.

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

Eddie Bauer, a Redmond, Wash.-based retailer of casual sportswear and outdoor accessories, plans to use the proceeds of the deal to partially repay a term loan that will be amended and restated concurrently with the offering.

"I don't believe we're ever going to see it," a sellside convertible trader said. "It looks like it's only going to go to a couple of guys."

Analysts said the attractiveness of the deal would depend on the stock borrow rebate, with conflicting views in the market over how easy it would be to borrow the stock.

"I heard borrow is going to be very difficult on that," one analyst said. "Keep in mind that they emerged from bankruptcy back in '05, so it's not the biggest name out there. It's a small company, and most of the creditors basically got the equity in the new company when this thing came out of bankruptcy."

The analyst said the deal modeled around 101 with a "prohibitive borrow."

Another analyst said some on the Street reported that "borrow is top-rate," but was skeptical about that.

"I have a feeling it doesn't incorporate any shorting that is going to be done with this deal," the analyst said. "And it's a pretty small company, not a big float, which makes me wonder."

The analyst said that with a top-rate borrow, the deal modeled several points cheap, but one a poor borrow the valuation drops much closer to par.

"The borrow could definitely be an issue with this one," the analyst said.

The second analyst also noted that the company's credit spread could be wider than expected at first glance.

"If you look at the work the ratings agencies did on this, they have B2 and B- for the term loan, the senior credit ratings are about the same, but they estimate the recovery value even on the term loan at 50% or less," the second analyst said. "So if you factor in the term loan it could be wider...There's still a fair amount of debt here. The reason you find so much disparity between one high yield and another is the chances of recovery."

Strategic Hotels quiet

Strategic Hotels' planned $150 million of five-year exchangeable senior notes did not attract bids in the gray market on Thursday.

The deal was talked at a coupon of 3% to 3.5% and an initial exchange premium of 20%. Strategic Hotels stock (NYSE: BEE) eased 0.39% or 9 cents to settle at $23.08.

"It's another REIT, what more can I say?" a convertible trader said. "I don't think it's exciting at all."

The notes were offered at par.

There is an over-allotment option for a further $30 million.

Deutsche Bank, Citigroup and JP Morgan are the bookrunners of the Rule 144A offering.

Strategic Hotels & Resorts, a Chicago-based real estate investment trust that focuses on upscale hotels, will use the proceeds to enter into capped call transactions, buy back up to $25 million of its common stock, repay outstanding bank debt and fund general purposes.

"It's a REIT, and it's got a negative yield advantage with the convertible coupon relative to its common dividend," one convertible analyst said. "That means it's going to carry like crap, so I'm sure the hedge funds won't be too happy with this."

But another analyst said a negative carry was not necessarily an issue for REIT convertibles.

"It's almost always negative carry now," the analyst said. "The question is how negative? That's not the play with REIT converts. Those are attractive if you can gamma trade them because the bond floors are so high, even if it's got negative carry you can still play them."

Ambassadors sails on maiden voyage

Ambassadors' new 3.75% convertible senior note due 2027 was 100.5 bid near the closing stock price of $45.28 on Thursday, also traders reported seeing bids as high as 103 earlier in the day.

"There were some bids on the Street this morning, but I don't know anyone who has it," a sellside convertible trader said.

Ambassadors' $85 million offering priced with an initial conversion premium of 25%.

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

Thomas Weisel Partners was the bookrunner of the Rule 144A offering.

Ambassadors, a Newport Beach, Calif.-based cruise and travel company, said it will use the proceeds to retire $60 million in seller financing expected to arise from its pending acquisition of Windstar Cruises and to fund general purposes.

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