ProLogis jumps on equity raise; Micron rises in the gray, existing convertible adds; Alcoa steady

By Rebecca Melvin

New York, April 8 - ProLogis convertibles jumped sharply Wednesday as outright and hedged investors scooped up the real estate investment trust's bonds after the company was able to raise $1 billion in new equity and its credit tightened, market players said.

Other REIT names were also better bid amid expectations that these companies will be able to "equitize" their debt obligations, a New York-based sellside trader said.

Boston Properties Inc. edged higher for a second consecutive day; and SL Green Realty Corp. was also in trade.

Micron Technology Inc. gained in the gray market ahead of pricing that was expected after the market close. Price talk was revised mid-session in favor of the issuer to 4.25% to 4.5% on the coupon with an initial conversion premium of 22.5%.

Micron's existing convertibles, which are set to mature the year after the new paper, strengthened.

Alcoa Inc.'s convertibles were mostly steady in quiet trade as its underlying shares wavered after the aluminum giant posted a second consecutive loss due to lower demand and pricing.

In Europe, a known convertible issuer, Cap Gemini SA, launched and priced €500 million of convertibles due 2014 to yield 3.5% with a 35% initial conversion premium.

The new issue caused Cap Gemini's existing 1% convertible due 2012 to cheapen.

Overall, the convertible market was quiet ahead of Passover, which was set to begin Wednesday evening, and traders said ranks thinned in the session ahead of the holiday.

ProLogis trades higher

All three ProLogis convertibles were up in active trade. One issue jumped more than 10 points, while on average the paper was up 6 points to 8 points after the Denver-based industrial REIT priced 152 million shares in a public offering.

"ProLogis traded a bunch," one sellsider said. While another sellsider said it was "on fire."

The ProLogis 1.875% convertible senior notes due 2037 traded last in size at 63.85, which was up about 14 points from previous levels.

The ProLogis 2.625% convertible senior notes due 2038 jumped a less dramatic 4 or 5 points to 60.875, while the ProLogis 2.25% convertible senior unsecured notes due 2037 traded at 67.75, up 6 points.

"They raised almost a million in equity, and credit got about 250 [basis points] tighter overnight," a New York-based sellsider said. "The paper still sets up attractively for outrights and hedges, and the entire REIT space was up, bid only."

Investors viewed the equity raise favorably for the sector because companies look like they may be "able to equitize in order to satisfy their debt obligations," the sellsider said.

Meanwhile, The Boston Properties' 3.75% convertibles due 2036 traded last at 78.5 after rising to 79.25 earlier Wednesday, which was up from 77.9 on Tuesday.

Boston Properties is an office space REIT with properties in Boston, Washington, D.C., San Francisco, Princeton, N.J., and New York.

The 4% convertibles of New York-based office/commercial REIT SL Green remained steady at 90.5 bid, 91.50 offered.

SL Green's 4% senior unsecured convertible notes due June 15, 2025 were acquired when SL Green merged with Reckson Associates Realty Corp.

Alcoa steady

Alcoa's 5.25% convertibles due 2014 continued to trade in the 140 bid, 142 offered range on Wednesday even as the underlying shares see-sawed through the session and ended up 27 cents, or 3.5%, to $8.06.

After the market close Tuesday, the Pittsburgh-based aluminum producer posted a first-quarter net lost of $497 million, compared with earnings of $303 million in the year-earlier period. Revenue fell 36% to $4.1 billion from $6.5 billion, excluding divested business.

A slump in metal prices and the auto industry, as well as lower global economic demand, hurt results.

But UBS raised Alcoa's share price target to $8.25 from $7.25, noting that results in Alcoa's Engineered Products business were better than expected and that the company expects to achieve additional cost savings by the end of the year.

Micron gains in gray

Price talk on the Micron new issue was revised midsession in favor of the issuer to 4.25% to 4.50% for the coupon and 22.5% for the initial conversion premium. Initial talk was 5% to 5.5% for the coupon and 17.5% to 22.5% for the initial conversion premium.

Final terms on the issue had not been settled by press time. A syndicate source said that pricing would probably occur late Wednesday.

The Boise, Idaho-based maker of semiconductor devices was expected to price $200 million of 4.5-year convertible senior notes.

Concurrently, Micron plans to price $250 million, or 55.3 million shares of common stock, for total proceeds of about $450 million.

The new convertibles were plus 5 bid in the gray market early in the session and later were seen trading at 6.25, with sources putting the market at 6 bid, 7 offered.

In connection with the convertibles, Micron planned to enter into capped call transactions, with a cap of about 60% higher than the sale price of Micron's common stock in the stock offering.

Proceeds are expected to be used to pay the cost of the capped call and for general corporate purposes, including working capital and capital expenditures and potential acquisitions and strategic transactions of business, technologies or products.

Micron existing convertible adds

Micron's 1.875% convertibles due 2014 traded at 52 versus a share price of $4.15 during the session, which was up from a previous level of about 50.

Micron common stock spent the day in negative territory but pared losses at the end of the session, to end almost unchanged at $4.28.

"I'm surprised that they are only 50," a sellsider said. "If you think it's going to take a long time for this company to turn, then you're better off in the old [issue.] If you think the stock is going to go up, you want the new paper."

The old issue is yielding 15% to maturity.

Cap Gemini prices

Cap Gemini priced €500 million of convertible bonds in the Oceane structure to yield 3.5% with a 35% initial conversion premium.

The new issue was seen attractive versus the issue price amid supporting factors, including familiarity with the name, likely inclusion in convertible indices, scarcity, and S&P's BBB- rating of the issuer, according to a note published by Barclays Capital Research.

Cap Gemini's existing 1% convertible due January 2012 has cheapened this morning from an implied volatility of 51% to 39%, which the Barclays analysts believed was more in line with the new issue and with a number of other balanced convertibles.

The credit spread was 300 bps, with five-year credit-default swaps on the issuer indicated at 200 bps mid market, wider by 15 bps from Tuesday's closing level, the analysts wrote.

Cap Gemini's existing 2010 convertibles, which will potentially be bought back by the company, now imply a credit spread of about 150 bps, which is fair, Barclays analysts Angus Allison, Luke Olsen and Heather Beattie wrote.

The Regulation S bonds priced at the midpoint of talk for the coupon, which was 3.25% to 3.75%, and at the rich end of revised talk for the premium. The premium range was raised to 30% to 35% after initial talk of 25% to 30%.

BNP Paribas Securities Corp., J.P. Morgan Securities Inc. and Morgan Stanley & Co. Inc. were joint bookrunners and joint lead managers for the bonds. Lazard-Natixis was acting as co-lead manager.

The bonds, which have a term of four years and 256 days, are non-callable for three years and provisionally callable thereafter at a price trigger of 130%. There is takeover protection, and dividend protection via a conversion price adjustment schedule.

Cap Gemini is a Paris-based consulting and outsourcing company.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Boston Properties Inc. NYSE: BXP

Micron Technology Inc. NYSE: MU

ProLogis NYSE: PLD

SL Green Realty Corp. NYSE: SLG

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