Digital Realty ignored on debut; Quantum seen as cheap; Bank of America, Wells Fargo rebound

By Kenneth Lim

Boston, April 15 - Digital Realty Trust, Inc.'s new exchangeable notes entered the secondary market on a quiet note on a relatively slow day for convertibles.

The new notes were last seen around par in the gray market after the deal was upsized and priced within talk.

Financials remained in the spotlight, with convertible preferreds slightly better on the back of a rally in the common stocks.

Quantum Corp. was seen trading just slightly under its tender bid, and one analyst reckoned that the markets could be missing a bargain.

Digital Realty makes quiet entrance

Digital Realty's new 5.5% exchangeable senior unsecured notes due 2029 failed to stir activity in the secondary market on its debut Wednesday.

The deal arrived at the middle of price talk, which indicated for a coupon between 5.25% and 5.75% and an initial conversion premium of 17.5% to 22.5%. At pricing, the initial conversion premium was set at 20%.

The offering was upsized to $260 million with a greenshoe for an additional $40 million, from the original $200 million plus $30 million greenshoe.

Banc of America/Merrill Lynch, Citigroup, Credit Suisse and Deutsche Bank are the bookrunners of the Rule 144A offering.

Proceeds will be used to repay revolving debt, to acquire additional properties, to fund development and redevelopment opportunities and for general purposes.

Digital Realty is a San Francisco-based real estate investment trust that focuses on the technology industry.

Traders said they did not see the paper change hands on Wednesday, although the notes were seen at par late Tuesday.

"They weren't priced as cheap as the other deals that came," a sellside convertible trader said. "And it's a REIT, and people are not too comfortable with the space yet. It's a combination of those two factors."

Investors were looking for something better in terms of pricing, the trader added.

"Obviously it wasn't placed cheap enough," the trader said.

Another trader felt that the deal was reasonably priced.

"Look, people are complaining because it didn't come 10 points cheap," the second trader said. "It's not the best looking piece of paper in the market right now, there are lots of other names that are a better bargain, which is why nobody's trading these, but the underwriters got a good deal for the issuer, so that's the other side of this equation."

Financials rebound

Financials overcame Tuesday's dip to follow the broader market higher, but investors remain cautious about the sector's outlook, market sources said.

Bank of America Corp.'s 7.25% convertible preferred rose 0.5 point to 516.25, while the common stock gained 1.53% or $0.16 to close at $10.44.

Bank of America is a Charlotte, N.C.-based bank holding company.

Wells Fargo & Co.'s 7.5% convertible preferred was up about 0.25 point at 575. San Francisco-based Wells Fargo, a bank holding company, saw its common stock close at $19.55, up by 0.1% or $0.02.

The financials got a boost from optimism about the U.S. economy, market sources said. The Federal Reserve's Beige Book report suggested the economic slowdown is beginning to stabilize.

"I think you're going to see a lot of this back and forth for a while until the air clears up a little better," a sellside convertible trader said. "I think the market is getting a lot of mixed signals, UBS is looking at a loss, there's some worries about credit card defaults, but you also have banks reporting profits again, the Fed report. The market is hungry for some positive news, which is why you're seeing all these rallies, but it's too early to tell if this is a real recovery."

Quantum seen as cheap

Quantum's 4.375% convertible due 2010 was seen trading around 65.5 on Wednesday, about 4.5 points below an ongoing tender bid by the company at 70.

"They traded today at 65.75, the tender price is 70, so [May 12] when the tender ends," a West Coast analyst said. "It's kind of crazy to look at it, but your yield to tender is over 100% annualized, which is ridiculous."

Quantum on March 27 tendered for $142 million of the $160 million outstanding amount of the 4.375% convertibles. The offer expires May 12. Quantum, a San Jose, Calif.-based data storage company, said it would fund the tender with a $100 million term loan from EMC Corp.

The analyst had heard that most of the bonds had already been tendered, and there were reports Wednesday that the company had gotten waivers to buy up the rest of the convertibles that it had not tendered for.

"EMC is giving them all this money to take out $100 million, today they got the waiver to buy the rest of it," the analyst said.

Quantum could not be reached for comment.

The analyst said the high potential yield play may have been missed by the market.

"I don't think people know about this because it's not in the news," the analyst said.

Mentioned in this article

Bank of America Corp. NYSE: BAC

Digital Realty Trust, Inc. NYSE: DLR

Quantum Corp. NYSE: QTM

Wells Fargo & Co NYSE: WFC

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