Vornado on tap; Komag jumps in; SL Green, SBA only laggards on new deal train; Freeport up in gray

By Ronda Fears

Memphis, March 21 - The new deal train continued to rumble through the convertible market Wednesday with Vornado Realty Trust launching a jumbo $1.4 billion overnighter and data storage firm Komag Inc. tossing a $200 million offering in for Thursday's business.

So far, the market is on track to see $5.95 billion of new paper put into circulation by the time the week is finished.

Vornado's return to the convertible market is another extension of the recent trend of real estate investment trusts tapping the convertible market. Even before it surfaced after Wednesday's close, there were three REIT deals that priced so far this week, which caused one buyside market source at an outright shop to quip, "This market is so hot that even REIT deals are popping out of the box."

After Vornado's deal surfaced, he added, "A billion here, a billion there - the convertible market is growing again!"

Vornado's deal, like industrial REIT ProLogis', is being reoffered below par, which a buyside market source at a hedge fund said generates a psychology of discounting among potential players putting orders in for allocation.

"People feel like they are getting some type of discount," he said. "Sure, it bumps up your current yield, but what they don't consider is that they are not getting any extra cash."

It hardly seems necessary, as he sees it, what with allocations so slim because of extremely high demand for new paper in the market. This buysider liked the Pioneer Cos. Inc. deal as well as ViroPharma Inc.'s but both were small, $100 million and $225 million respectively, but "it was impossible to get a meaningful allocation."

A sellside source said the so-called discounting was not so much a means to keep interest among buyers, other than the psychological factor - which he agreed with - but a way to keep issuers in the game.

Sales guys say, indeed, there are lots of "mouths to feed." And in the quest by banker types to please the issuer as well as potential buyers, one market source remarked that the newest trend in new deal structures among convertibles is an attempt to be proactive on volatility in the event of takeovers, as the merger frenzy of 2007 rages on.

"Personally, I manage outright accounts/funds, not convertible arbitrage. And I like discount bonds," said the outright fund manager.

"My strategies usually benefit from takeovers/LBOs. But arbitrageurs are very important in the convertible market, and new deals have been coming with 'ratchets' that adjust the conversion ratio to protect against loss of conversion premium in takeovers.

"It seems new issues chronically come with new features that reflect contemporary fears. I like new features - a confusing market will be less efficient and will provide more opportunities for those who have the deepest understanding. As the late Mr. Ed Ball of the du Pont foundation used to say, 'Confusion to the enemy!'"

Vornado vaults another deal

Four months after a jumbo $1 billion convertible offering, Vornado launched after the close Wednesday $1.4 billion of 20-year convertible senior debentures talked with a coupon of 2.85% and an initial exchange premium of 30% to be reoffered at 98 to 98.5.

The registered issue is scheduled to price on Thursday before the market opens via joint bookrunners J.P. Morgan, Citigroup Global Markets, Deutsche Bank and Lehman Brothers.

The notes are non-callable for five years and may be put in years five, 10 and 15. There also is change of control protection.

There is an over-allotment option for a further $210 million.

New York-based Vornado, a diversified real estate investment trust, said proceeds would be used for working capital and other corporate purposes.

In November, Vornado brought a $1 billion exchangeable at 3.625%, up 30% and it was reoffered at 97.5.

Komag coming Thursday

Komag launched $200 million of seven-year convertible senior subordinated notes after Wednesday's close. The issue is talked to price at par with a coupon of 2.375% to 2.875% with an initial conversion premium of 73% to 77%.

The issue includes embedded warrants equal to 0.75 times the number of underlying shares.

There is dividend and change of control protection, including compensation for warrants as well.

The San Jose, Calif., data storage device maker intends to use proceeds to repurchase common stock in connection with this offering. Komag said it also plans to use proceeds to pay the redemption price for its 2% convertible subordinated notes due 2024 to the extent not converted, and any remaining proceeds for general corporate purposes, which may include additional stock repurchases.

The issue is scheduled to price on Thursday after the market close.

Extra Space prices at mids

The only item that was scheduled for Wednesday's business, Extra Space Storage Inc.'s 20-year exchangeable senior notes, was quiet in the gray market beforehand but the issue was upsized to $250 million and priced roughly at the middle of price talk with a coupon of 3.625% and 20% initial exchange premium.

The Rule 144A deal was boosted from $200 million. It was talked to price with a coupon of 3.375% to 3.875% and an initial exchange premium of 17.5% to 22.5%.

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.

SL Green flags in secondary

Amid heavy demand, SL Green Realty Corp. priced an upsized $750 million of 20-year exchangeable senior notes smack on price talk on Wednesday before the market opened with a coupon of 3% and an initial exchange premium of 25% in an overnight transaction.

The issue was increased from $500 million, but it flagged in the secondary.

It was seen trading most of the session in the area of 99.375, according to traders, but was taken out at 99.5 versus $136.25 for the underlying stock. SL Green shares (NYSE: SLG) closed down by $1.53 at $173.11 and were seen last in after-hours activity lower by another $1.78 at $135.33.

When asked why the deal was weak in the immediate aftermarket, one source said, "A REIT, the sector a bit softer with the bond market. My model has it 3.5% rich, for whatever that is worth."

He used a credit spread of 486 basis points and 25.2% volatility; a 2% dividend on the common stock also had to be factored in.

Yet, he added, "They most likely they filled all the demand."

Indeed, a sellside source said the deal was three times oversubscribed.

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.

Freeport higher in gray

Freeport-McMoRan Copper & Gold Inc.'s $1 billion mandatory on Thursday's business moved up in the gray market to a bid of 0.5 point over issue price, from a bid of 0.25 point over the day before, as players hold it in check because of the terms but note interest in it as one of the few mandatories to hit the market in a while.

The three-year issue is talked with a dividend of 6.75% to 7.25% and an initial conversion premium of 18% to 22%.

Freeport-McMoran, a New Orleans, La.-based mining concern, said the proceeds of the deal will be used to repay two outstanding term loans due 2012 and 2014 that were used to help fund its acquisition of Phelps Dodge Corp.

ViroPharma up 3 out of gate

ViroPharma's newest convertible traded up strong out of the gate, better by as much as 3 points according to one trader, but it retreated to close out at 101.5. It had traded 1 point over issue price in the gray market the day before.

The stock (Nasdaq: VPHM) dropped 28 cents to close Wednesday at $13.96.

The Exton, Pa., biotech priced after Tuesday's close an upsized $225 million offering of 10-year convertible senior notes at the rich end of talk at par with a coupon of 2.0% and an initial exchange premium of 32.5%.

It was boosted from $200 million and had been talked to price with a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%. The greenshoe was reduced to $25 million from $30 million.

ViroPharma plans to use $20.9 million of the proceeds to fund convertible note hedge and warrant transactions, and the remainder for general purposes such as strategic investments or acquisitions of products, technologies or complementary businesses although the company said it has no commitments or agreements for any specific acquisitions.

Pioneer up 4 point

Pioneer's new issue traded up as much as 4 points, according to a buyside source, and was one of the day's more popular deals as one of the rare vanilla convertible fares on the table. The issue had been 1 point over issue price in the gray market in advance of pricing.

The stock (Nasdaq: PONR) gained 84 cents to close Wednesday at $28, after losing 6% the day before when the deal launched.

The company priced $100 million of 20-year convertible senior subordinated notes at the rich end of talk on Tuesday after the market closed at par with a coupon of 2.75% and an initial exchange premium of 30%.

It had been talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%.

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

Prologis at about issue price

ProLogis had a so-called vanilla convertible on the slate, as well, but buysiders said concern about a pullback in the REIT market as well as volatility in the sector edged it out of getting much of a bounce in the aftermarket. One trader said the issue ended the day about at issue price; it had been bid up by 0.125 point in the gray market before pricing.

The stock (NYSE: PLD) gained 92 cents to close at $64.74 on Wednesday.

The deal was upsized to $1.1 billion from $1 billion and priced within range.

ProLogis priced the 30-year convertible senior unsecured notes on Tuesday after the market closed with a 2.25% coupon and a 20% initial conversion premium. The coupon was at the cheap end of talk, which had put it at 1.75% to 2.25% while the initial conversion premium was in line with talk of 20%.

It was reoffered at 98.25 - at the middle of the price talk range of 98 to 98.5.

The Denver-based REIT, which focuses on industrial properties, said it will use proceeds to partially repay its revolving debt and for general purposes.

SBA bid up to 102.5 early

SBA Communications Corp. priced within range and was not reoffered below par, according to sellside sources. It was bid up 2.5 points over par early in the day, one trader said, but another pegged the issue settling right at around par.

It had been seen in the gray market ahead of pricing with a bid of 0.125 point over issue price and offered at 0.625 point over.

The stock (Nasdaq: SBAC) gained in Wednesday's session by 98 cents to end at $29.18, which the second trader attributed to the issue getting done on swap, including warrants with a strike price of $55.

SBA priced $300 million of 3.75-year convertible senior notes at the midrange of talk on Tuesday after the market closed at par with a coupon of 0.375% and an initial exchange premium of 19%. The issue was talked at a coupon of 0.125% to 0.625% and an initial conversion premium of 17.5% to 22.5%.

The company said it would use $91.2 million of proceeds to buy back 3.24 million shares of common stock and $49.9 million for hedge transactions to increase the effective conversion premium and effectively lower the possible dilution from conversions of the issue.

SBA, a Boca Raton, Fla.-based owner of wireless communications towers, said remaining proceeds will be used for other general purposes, including the purchase towers, construct towers, and/or lease land to place towers.

The deal had raised different concerns for different players, some concerned about paying for volatility and others because of fundamentals like leverage and cash flow at the wireless communications tower operator.

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