Washington deal opens flat; Alliant deal bid up in gray; OMI dragged by oil; Komag shrugs off cut forecast

By Kenneth Lim

Boston, Sept. 6 - New deals gave a quiet convertible bond market something to talk about on Wednesday, although Washington Real Estate Investment Trust's newly priced offering was mostly flat on its debut.

Alliant Techsystems Inc.'s existing convertibles saw some selling after the company launched a $270 million deal that the market saw as a slightly more attractive piece of paper.

Meanwhile, oil tanker operator OMI Corp. was slightly lower outright as the sector took a hit from lower crude prices.

Komag Inc.'s 2% convertible due 2024 was marked lower but did not see any significant trading volume despite a sharp drop in the stock after the company lowered its third-quarter outlook.

The Komag convertible was marked at 126.25 bid against a $32 stock price on Wednesday, an 18-point outright fall from levels a day earlier. Komag stock (Nasdaq: KOMG) closed at $31.33, down by 13.6% or $4.93.

"Komag's surprisingly quiet with the stock down $4," a sellsider said. "I thought that with the news about them cutting their forecast the convert would be pretty active, but it's quiet today."

San Jose, Calif.-based Komag said Wednesday that it now expects third-quarter sales between $233.6 million and $240.6 million, below the company's earlier guidance for about $245.3 million. The maker of hard disk drive components also cuts its net margin forecast to between 14% and 16% from its earlier outlook of 16% to 17%.

The market in general had a lackluster session, despite hopes that activity would pick up in the first full week in September.

"I saw on TV that they were expecting a busy day," a convertible bond trader said. "That's not going to happen. Last week and this week is always slow. I know, because I've been doing this for 25 years."

A quiet August has left investors yearning for some action, which could be good news for convertible bond issuers, the trader said.

"I think the market's so starved [for new issues], anything they offer will work," the trader said.

Washington REIT deal flat

Washington REIT's newly priced 3.875% convertible due 2026, however, may have caught the market just as investors are seeing one too many issues from real estate investment trusts, market sources said.

The convertible, which priced before the market opened, was bid at its reoffered price of 99.5 early Wednesday. Washington REIT stock (NYSE: WRE) closed at $39.50, a drop of 3.19% or $1.30.

"We traded some early on in the day, but they weren't too active in the Street," a sellside convertible bond trader said.

Washington REIT early Wednesday reoffered $100 million of 20-year convertible senior unsecured notes at the rich end of talk, at a coupon of 3.875% and an initial conversion premium of 22%.

The overnight deal was reoffered at 99 to 99.5 during price talk, with the coupon and premium already set.

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

Credit Suisse was the bookrunner of the registered off-the-shelf deal.

Washington, a Rockville, Md.-based investment trust with properties in the greater Washington and Baltimore metro regions, said it will use the proceeds to repay its $105 million outstanding of 5.9065% debt due between July 2007 and July 2008.

The trader called the deal "generic REIT pricing" that lacked an interesting angle.

"Guys are buying this now because they're thinking, oh, REIT common will certainly go down a lot," the trader said. "But at 3.875%, if this stock goes bad, if they get knocked down, the tendency for REITs is to maintain their dividends as long as they can even in a down market, so a common stock that's yielding 3% today, if it gets knocked down, it's going to be a 7% yield on the common easily...And with the five-year call, things could be dramatically different in five years. You could see this premium disappear very quickly in that time."

A sellside convertible bond strategist said that while the pricing of the deal was "definitely within the scope of all the REIT deals," the lack of excitement may also have to do with REIT fatigue.

"There have been over $3 billion of REIT deals over the last two months," the sellsider said. "It's not necessarily the most exciting deal from that perspective. I think people are a little tired of the majority of new deals being REITs."

A buyside convertible bond analyst also noted that the deal may have been too small for some funds.

"All things being equal, you'd rather buy a larger issue that's going to trade more liquid," the buysider said.

Alliant deal bid up in gray

Alliant's planned $270 million of five-year convertible senior subordinated notes was bid slightly higher in the gray market on Wednesday, with observers describing price talk as fairly attractive. The company's existing 3% convertible due 2024, meanwhile, was slightly lower as investors considered switching to the new paper.

The 3% convertible traded at 117.875 against a stock price of $77.75 on Wednesday, about a point lower outright. Alliant stock (NYSE: ATK) slipped 0.1% or 8 cents and closed at $77.83.

"You did see the 3% bonds come in about a point or so," a sellsider said, noting that the new notes looked about 1% cheap at the midpoint of talk. "It was probably 22-ish volatility before today. The fact that they're pricing a shorter-dated new issue about 20% volatility made the new bonds interesting."

The new deal was talked at a coupon of 2.5% to 3% and an initial conversion premium of 20% to 25%, with pricing expected after the market closed. The notes were offered at par, and there is an over-allotment option for a further $30 million.

Bank of America was the bookrunner for the Rule 144A offering.

Alliant, an Edina, Minn.-based defense contractor, said it will use the proceeds to buy back $100 million of its own stock, to contribute to its defined benefit pension plan and for other general purposes. The company is also entering into convertible note hedge and warrant transactions.

A buysider said the convertible was interesting from a hedged perspective.

"It looks rather attractive," the buysider said. "I think it's priced reasonably well."

OMI slips on oil prices

OMI's 2.875% convertible due 2024 was about ½ point lower outright on Wednesday as the stock retreated with oil prices.

The convertible was marked at 97.375 bid, 97.625 offered against a stock price of $22.05. OMI stock (NYSE: OMM) closed at $21.76, down by 4.14% or 94 cents.

Stamford, Conn.-based OMI, which charters vessels to transport oil, was dragged down with the rest of the sector as crude oil prices fell below $68 a barrel on Wednesday. The sector also took a hit after Citigroup lowered its recommendation on refiners Sunoco Inc. and Valero Energy Corp. over concerns about refining margins.

Despite Wednesday's slip, a buyside convertible bond trader said the convertible looked interesting.

"I like that name because the company is buying back the stock," the trader said.

OMI in late July said it still has authority to buy back $43.6 million of its own stock, and that its "best use of cash" was to repurchase its shares.

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