First Industrial, BioMed higher on debuts; XM gains further; Red Hat climbs with stock; Incyte plans deal

By Kenneth Lim

Boston, Sept. 20 - The convertible bond market saw activity pick up on Wednesday, with two new issues giving investors fresh paper to trade with.

First Industrial Realty Trust Inc. was slightly better after the deal was reoffered below original guidance. BioMed Realty Trust Inc. also saw modest gains after it priced at the cheap end of talk.

Meanwhile, the primary market continued to be active, with Incyte Corp. launching an unusually structured $132 million offer of 20-year convertible senior notes. The notes, which bear a coupon of 3.5% and an initial conversion premium of 126.2%, were offered at a discounted price of 77 to 79 during marketing.

Beyond the new issues, XM Satellite Radio Holdings Inc.'s 1.75% convertible due 2009 continued to improve outright on the back of a climbing stock. The convertible was seen at 80.625 against a stock price of $13.675. XM stock (Nasdaq: XMSR) gained 1.65% or 22 cents to close at $13.53.

"I don't necessarily think anything's happening here," a sellside convertible strategist said. "There's a rumor that potentially Howard Stern may...be on regular radio as well as on [XM rival] Sirius, so some think that it may possibly dilute any advantage that Sirius has."

XM is a Washington-based satellite radio broadcaster.

The sellsider pointed out that the relatively short structure of the XM convertible continues to attract some investors.

"The converts are also the shortest-dated paper in the XM capital structure," the sellsider said. "It's a relatively short piece of paper, just about three years, and 80 to par in three years with potential equity upside."

Red Hat Inc. also improved about 3 points outright on the back of a stock rally. Its 0.5% convertible due 2024 was 113.5 bid, 114 offered against the closing stock price of $25.07. Red Hat stock (Nasdaq: RHAT) rose 4.46% or $1.07 on Wednesday.

"Red Hat stock was up pretty strong today," a convertible bond trader said. "People generally fall into two camps on this company. One camp thinks there's no chance to very little chance of it getting bought, and the other thinks there's a very good chance of it being bought. That makes it an interesting name to watch."

First Industrial rises slightly

First Industrial's newly priced 4.625% exchangeable due 2011 had a lackluster debut on Wednesday, eking out a modest gain of less than a point above its reoffered price of 99.

The exchangeable was seen trading at 99.25 to 99.625 on Wednesday, while the First Industrial stock (NYSE: FR) slipped 0.24% or 10 cents to finish the day at $42.34.

First Industrial on Tuesday priced the $175 million deal at a coupon of 4.625% and an initial conversion premium of 20%.

The exchangeables were originally offered at par. Price talk also guided for a coupon of 4.125% to 4.625% and an initial exchange premium of 20%.

There is an over-allotment option for a further $25 million.

JP Morgan, Credit Suisse and Merrill Lynch were the bookrunners of the Rule 144A offering.

First Industrial, a Chicago-based real estate investment trust that develops industrial real estate in the United States and Canada, said it will enter into hedging transactions using the proceeds of the deal. It will also use the proceeds to reduce its borrowings on a 5.867% loan, acquire and develop properties and pay off the $150 million outstanding of 7% senior notes due Dec. 1, 2006, upon the maturity of that debt security.

Interest in the deal was generally muted.

"It came at 99," a convertible bond trader said. "We definitely would have paid 98."

A sellside convertible bond analyst felt that First Industrial's deal did not offer anything different other recent real estate investment trust offerings.

"Their structures all look so much alike," the sellsider said. "It's fair at the reoffered price, but so were most of the other REITs."

Another convertible bond analyst noted that the stock borrow on the offering was not great.

"The borrow was definitely an issue on that one," the analyst said. "On a normal borrow it would have looked great."

BioMed Realty sees modest gains

BioMed's new 4.5% exchangeable due 2026 also had a positive but slow start on Wednesday, bid at 100.063 versus a $30.85 stock price. BioMed stock (NYSE: BMR) closed at $30.99, a 1.59% or 50-cent drop.

BioMed priced its $150 million offering at the cheap end of talk Wednesday before the market opened, at a coupon of 4.5% and an initial exchange premium of 20%. The notes, which were offered at par, were talked at a coupon of 4% to 4.5% and an initial exchange premium of 20%.

There is an over-allotment option for a further $25 million.

Credit Suisse and Morgan Stanley were the bookrunners of the overnight Rule 144A offering.

BioMed, a San Diego, Calif.-based real estate investment trust that focuses on biotech laboratory and office space properties, said it will use the proceeds of the deal to repay a revolving loan and for general corporate purposes.

"These things kind of went quiet...The stock closed down, it was trading above par, so obviously it didn't do too badly," a convertible bond trader said.

"Why guys liked it was, you're basically buying mid- to high-teens implied volatility, when historically it's a little higher than that," the trader said.

But a convertible bond analyst pointed out that BioMed's credit profile was also a little wider than most other real estate investment trusts.

"The credit is a little wider than most of the REITs we've seen, so you'd expect somewhat of a higher volatility for that," the analyst said.

Incyte launches deal

Incyte also planned to price after the market closed on Wednesday an unusually structured $132 million offering of 4.4-year convertible senior notes. The notes have a coupon of 3.5%, an initial conversion premium of 126.2%, and were expected to be offered at a discounted price of 77 to 79.

The notes, which mature in February 2011, will have par of $1,000, and will yield 10.12% to 9.45% depending on the pricing.

There is a greenshoe option for a further $19.8 million.

Piper Jaffray is the bookrunner of the Rule 144A offering, which was expected to price after the market closed.

Incyte, a Wilmington, Del.-based drug maker, said it will use the proceeds of the offering to redeem its outstanding 5.5% convertible subordinated notes due Feb. 1, 2007. Any remaining proceeds will be used for general corporate purposes.

A buyside convertible bond analyst said such a deep discount was unusual in convertible bond deals, but noted that the conversion premium was also unusually high.

The buysider reckoned that the issuer was structuring the new deal to make it more attractive than Incyte's existing 3.5% subordinated convertible due 2011. That older paper matures at the same time, ranks below the new deal and trades at around 79 to 80, which would make it more expensive than the new series.

The result will be that Incyte will get to replace its 5.5% debt with cheaper paper, while the high conversion premium will limit the people who are going to short the stock.

"It's more of a high-yield play," the buysider said. "People are not going to short the stock, just buy the bond on the yield."

Holders of Incyte's older 3.5% subordinated convertible, however, will likely want to switch, the buysider said.

"I have a feeling people are going to short the older 3.5% convertible tomorrow [Thursday]," the buysider said.

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