Host Hotels up slightly on debut; ViroPharma, Pioneer lead, SBA, ProLogis dull in gray market

By Kenneth Lim

Boston, March 20 - New deals swamped the convertible market on Tuesday, with four offerings expected to price after the market closed and another three arriving later in the week.

Host Hotels & Resorts Inc. made modest gains in its debut after being reoffered at the rich end of talk.

ViroPharma Inc. and Pioneer Cos. Inc. led the coming deals in the gray market as investors described the deals as cheap. SBA Communications Corp. also gained slightly in the gray despite mixed reviews in the Street. ProLogis improved in the gray as well, but concerns about overpriced volatility put a damper on its deal.

Meanwhile, SL Green Realty Corp., Diversa Corp. and Extra Space Storage Inc. launched new deals worth about $775 million that will price this week.

The secondary market was quieter than usual as most eyes turned to focus on all the new paper arriving in the next few days.

"A lot of people were focused on the calendar," a sellside convertible trader said. "It seemed like people were preoccupied with a lot of paperwork with the new deals. Not a very exciting day."

Host gains after rich pricing

Host Hotels' new 2.625% exchangeable senior debenture due 2027 gained about three-eighths of a point outright on Tuesday after it was reoffered at the rich end of talk.

The exchangeable was 98.875 against a stock price of $26.75, while Host stock (NYSE: HST) slipped 0.63% or 17 cents to close at $26.71. The debenture was reoffered at 98.5.

"It was up a bit this morning," a buysider said. "I didn't like it that much. It wasn't cheap enough, especially after it came at the rich."

Host Hotels priced the $550 million deal on Monday after the market closed. The reoffered price range was 98 to 98.5 during price talk with the same coupon and exchange premium.

The exchangeables were issued by Host operating partnership Host Hotels & Resorts LP and are exchangeable into the listed company's common stock.

There is an over-allotment option for a further $50 million.

Goldman Sachs, Banc of America, Deutsche Bank, Citigroup and Merrill Lynch were the bookrunners of the Rule 144A offering.

Host, a Bethesda, Md.-based real estate investment trust that focuses on hotel properties, said the proceeds of the deal will be used to repay mortgage debt and fund general purposes.

A sellside convertible analyst said the deal was slightly interesting because of the company's market segment.

"It's looking like a 20%-21% vol, which is not usual vol for a REIT," the analyst said. "But it's a lesser-rated REIT and I think you can make a case that there's more volatility catalysts in that space than some of the other REITs."

ViroPharma leads in gray

ViroPharma's planned $200 million offering of 10-year convertible senior notes gained 1 point in the gray market on Tuesday ahead of pricing expected after the market closed.

"Of the four deals pricing tonight, I'd say the most attractive its ViroPharma because of the vol-spread pairing," a sellside convertible analyst said.

The convertible was talked at a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%. The notes were offered at par.

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

Goldman Sachs is the bookrunner of the registered offering.

The notes will be non-callable, and may not be put.

ViroPharma, an Exton, Pa.-based pharmaceutical company, plans to use the proceeds of the deal to fund convertible note hedge and warrant transactions and general purposes.

"I think it's kind of an interesting company in that the stock two years ago was under $2, but then it bought a drug from Eli Lilly that was a blockbuster," the analyst said. "The drug has since gone generic and cashflows aren't going to be as robust as the last year and half, but it's going to do OK. They've got a pipeline with some drugs in phase 2 and phase 3."

The analyst said the offering modeled about a point cheap at the midpoint of talk using a credit spread in the mid-200 basis points over Libor region and a volatility in the high 30% range.

"I like the pairing even if people are more conservative on the credit, but it's got high volatility," the analyst said. "It will be attractive at the mids, but if it comes at the rich end the attractiveness gets taken away."

A buysider said the deal appeared cheap, but there was concern about the long structure.

"I think some people don't like it because it's a 10-year piece of paper," the buysider said. "It's a biotech so a lot of things can happen in the next 10 years. Look at Atherogenics. All you need is one or two of their key drugs to fail and things are going to come crashing down."

Pioneer seen as cheap

Pioneer's planned $100 million offering of 20-year convertible senior subordinated notes also rose a point in the gray market on Tuesday on strong interest in the deal.

"It doesn't look bad," a convertible analyst said.

The deal, expected to price after the market closed, was talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%. Pioneer stock (Nasdaq: PONR) closed at $27.16, down by 5.86% or $1.69.

The convertibles were offered at par.

There is an over-allotment option for a further $20 million.

CIBC is the bookrunner of the Rule 144A offering.

Pioneer, a Houston-based maker of chlor-alkali products, said it will use the proceeds of the deal to redeem its $75 million outstanding of 10% senior secured notes due 2008, fund the expansion of its St. Gabriel, La.-plant and fund general purposes.

"It's kind of a small company, which is the biggest knock on it," the analyst said. "They're in the commodity chemical business, which is very cyclical, but their cashflows look strong and they're paying down higher-coupon debt."

The deal looked "multiple points cheap" at the midpoint of talk using a credit spread around 400 basis points over Libor and a volatility in the mid-30% range, the analyst said.

"It looks very cheap," the analyst said.

Prologis fails to excite

ProLogis's $1 billion offering of 30-year convertible senior unsecured notes was bid up by 1/8 point in the gray market on Tuesday with its deal seen as run-of-the-mill.

The offering was expected to price after the market closed. It was talked at a coupon of 1.75% to 2.25%, an initial conversion premium of 20% and a reoffered price range of 98 to 98.5.

"It's just another REIT," a buysider said. "There's nothing here that stands out. I think the underwriters were kind of aggressive on this one, but I think they'll find a way to get the deal done."

There is an over-allotment option for a further $150 million.

JP Morgan, Morgan Stanley and UBS Investment Bank are the bookrunners of the Rule 144A offering.

Prologis, a Denver, Colo.-based real estate investment trust that focuses on industrial distribution properties, said it will use the proceeds of the deal to partially repay its revolving debt and for general purposes.

"It comes down to what vol you're willing to pay," a sellsider said, adding that the convertible has an implied volatility in the low-20% range.

"The vol has been increasing, but paying 21% vol for a REIT seems to be aggressive," the sellsider said. "My expectations would be that it's probably lower...The thing we've seen is that most REITs have been climbing and recent vol has moved up, but if you believe these things will revert to a more normal vol assumption, then this would be paying too much."

SBA draws mixed reviews

SBA's planned $300 million of three-year convertible senior notes was 100.125 bid, 100.625 offered in the gray market on Tuesday.

The notes were offered at par and expected to price after the market closed. They were talked at a coupon of 0.125% to 0.625% and an initial conversion premium of 17.5% to 22.5%.

There is an over-allotment option for a further $50 million.

Lehman Brothers, Citigroup and Deutsche Bank are the bookrunners of the Rule 144A offering.

SBA, a Boca Raton, Fla.-based owner of wireless communications towers, said the proceeds of the deal will be used to fund convertible note hedge and warrant transactions, concurrently buy back $125 million of its common stock and for other general purposes.

The deal raised different concerns for different analysts.

"I think the 30% volatility is fine, but now I think it's hard to pay for it because everybody loves these credits and they trade tighter than they should," said one convertible analyst.

"If you look at their leverage it's scary. People love the cashflow story, but I would worry that with that credit assumption, if the credit is really that good then the volatility is going to come in. I don't really love that one."

Another analyst thought the company's credit profile was fine, but the deal simply modeled rich based on a more conservative volatility assumption.

"I think the credit is stable," the analyst said. "The company is free cashflow positive, but I don't think credit is going to improve because they're either going to expand or buy back shares...They have a pretty aggressive financial strategy or financial profile, but I do think it's stable and I do think it's deliberate. It would be interesting to see if it gets reoffered."

More new deals launched

Another three deals were announced Tuesday after the market closed, keeping alive the wave of new issuance that has turned March into the most active month this year for the primary market.

SL Green announced an overnight $500 million of 20-year exchangeable senior notes at a coupon of 3% and an initial exchange premium of 25%.

There is an over-allotment option for a further $75 million.

Citigroup was the bookrunner of the Rule 144A offering.

SL Green, a New York-based real estate investment trust that focuses on Manhattan commercial properties, said the proceeds of the deal will be used to repay existing debt, invest in additional properties, buy back its common stock and fund general purposes.

Extra Space's $200 million offering of 20-year exchangeable senior notes will price Wednesday after the market closes. It is talked at a coupon of 3.375% to 3.875% and an initial exchange premium of 17.5% to 22.5%.

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

Citigroup is the bookrunner of the Rule 144A offering.

Extra Space, a Salt Lake City, Utah-based real estate investment trust that focuses on self-storage facilities, said the proceeds of the deal will for acquisitions and for general purposes.

Diversa expects to price $75 million of 20-year convertible senior unsecured notes on Thursday after the market closes, talked at a coupon of 5% to 5.5% and an initial conversion premium of 27.5% to 32.5%.

There is an over-allotment option for a further $11.25 million.

UBS Investment Bank is the bookrunner of the Rule 144A offering.

Diversa, a San Diego, Calif.-based developer of specialty enzymes used in alternative fuel, industrial, health and nutrition processes, said the proceeds of the deal will be used to expand its biofuels business, develop its specialty enzyme business and for general purposes.

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