BRE, Digital Realty bright in the gray; Amkor mixed on delayed filing; Tanger, Retail Ventures plan deals

By Kenneth Lim

Boston, Aug. 9 - A number of new deals from real estate investment trusts kept the convertible bond market busy on Wednesday, with BRE Properties Inc.'s upsized offering enjoying higher bids in the gray market before it priced in the evening.

Digital Realty Trust Inc.'s planned deal also gained in the gray market before it was expected to price in the evening, as investors expressed interest in the higher volatility that the names offered.

Yet another REIT launched a deal on Wednesday, with Tanger Factory Outlet Centers Inc. announcing its $100 million exchangeable offering.

"It is the volatility here that makes a big difference," a buyside convertible bond trader said, explaining the new interest in a sector that has previously been shunned by many in the market.

Retail Ventures Inc. meanwhile launched a $125 million offering of five-year mandatory notes exchangeable into shares of its subsidiary, DSW Inc. Both Tanger's and Retail Venture's deals are expected to price Thursday after the market closes.

In the secondary market, Amkor Technology Inc.'s 2.5% convertible due 2011 added a couple of points outright after the company delayed its financial report. The delay fueled hope that a sweetener could be offered if the company tries to avoid default, although observers say the chances of getting anything may be slim. Meanwhile, Amkor's soon-maturing 5% convertible due March 2007 slipped slightly in line with the stock and on concerns about the company's ability to meet its obligations.

Charles River Laboratories International Inc., meanwhile, improved after the company reported better second-quarter sales and reaffirmed its full-year outlook. The company's newest 2.25% convertible due 2013 traded at 99.75 against a stock price of $38. Charles River stock (NYSE: CRL) closed at $38.35, up by 13.06% or $4.43.

Wilmington, Mass.-based Charles River said its second-quarter sales rose to $267.9 million from $250.9 million in the year-ago period despite lower profits that were weighed by losses from discontinued operations. The provider of research equipment and animal-based research tools maintained its guidance for 2006 earnings between $1.73 and $1.79 per share.

"Charles River reported earnings last night, stock's up over 10%," the buyside trader said. "The bonds have richened out quite a bit over the last couple of days."

BRE gains in gray

BRE's upsized $400 million offering of 20-year convertible senior notes were bid about a quarter point above par in the gray market on Wednesday before the deal priced within talk after the market closed.

The notes were seen bid at 100.25 on Wednesday although the stock (NYSE: BRE) slipped 2.82% or $1.62 to close at $55.85.

BRE offered the convertibles at par and priced the deal at a coupon of 4.125% and an initial conversion premium of 27.5%, one of the highest premiums for a real estate investment trust deal this year. Talk was for a coupon of 3.875% to 4.375% and an initial conversion premium between 25% and 30%.

The deal amount was originally $350 million. The greenshoe option for a further $60 million was also increased from the earlier over-allotment amount of $52.5 million.

There was a concurrent repurchase of $75 million of BRE stock at $55.85 per share.

Wachovia Securities and Deutsche Bank are the bookrunners of the Rule 144A deal.

BRE Properties is a San Francisco-based real estate investment trust that develops apartment communities in western United States. The proceeds of the deal are earmarked for funding the concurrent stock repurchase, for general corporate purposes and to temporarily reduce its unsecured debt.

Market sources said the deal was aggressively priced for a REIT, but the offering still received strong interest from outrights and hedge funds, underscoring the market's current interest in the sector.

A buyside convertible bond trader said the BRE deal had a higher premium than Digital Realty's deal, but BRE was a much better credit.

"I think they'll both do well at the mids or cheaper," the trader said.

The trader said there was a lot of hedge interest in the deal, partly because the company's stock buyback makes helps investors who want to set up hedge positions.

"It will come on what they call a happy meal," the trader said.

Digital Realty steps up in the gray

Digital Realty's planned $150 million of 20-year exchangeables was bid as high as a point above par in the gray market on Wednesday.

The exchangeables, which were expected to price after the market closed, were seen bid at 101, while Digital Realty stock (NYSE: DLR) closed at $27.62, down by 3.22% or 92 cents.

Digital Realty's deal was talked at a coupon of 3.875% to 4.375% and an initial conversion premium of 15% to 20%.

The debentures were offered at par and are exchangeable into Digital Realty Trust Inc. common stock. They are issued by Digital Realty's operating partnership subsidiary, Digital Realty Trust LP, but guaranteed by the parent company.

There is an over-allotment option for a further $22.5 million.

There is a contingent conversion hurdle at 130% of the conversion price.

Citigroup and Merrill Lynch are the bookrunners for the Rule 144A offer.

Digital Realty, a San Francisco-based real estate investment trust that focuses on technology-related real estate, will use the proceeds of the deal to reduce its debt under an unsecured credit facility due 2008. It also plans to reborrow amounts under that credit facility to fund acquisitions and for general corporate purposes.

A sellside convertible bond analyst said the realized volatility on the stock was elevated, but doubted that investors are willing to pay for more than 20% volatility. Using a volatility assumption just below 20% and a credit spread of about 180 basis points over Libor, the analyst reckoned that the exchangeable was just under 2% cheap at the cheap end of talk.

"If someone wants to say that its looks very interesting [at that level], they can, but I'm just saying that I wouldn't pay too much for the elevated volatility," the analyst said.

REIT deals get volatility boost

The recent spate of new convertible offerings from real estate investment trusts and the terms that issuers have managed to get - such as BRE's high premium - underscore the recent pickup in volatility in the sector, market sources said.

"I don't think any of them [recent REIT deals] have traded down," a buysider said. "One or two may have been issued below par to get the deal pushed through, but in general it's been pretty good."

REIT deals are sometimes panned for appealing only to a narrow range of investors.

"Part of the reason is that there's not a great yield advantage when the dividend on the stock is so high," a buysider said.

But "when all is factored in, you're still buying pretty cheap volatility," the buysider said.

That volatility plus the downside protection of a convertible make the risk profile rather attractive, the buysider said.

"You can get the same yield in many cases from the stock, but if the stock dividend is cut, in most cases your ratio is not adjusted, but if the dividend is increased, your conversion ratio is."

But the sellside convertible analyst said a REIT with elevated volatility, such as Digital Realty, may not warrant an investor paying for that volatility.

"These are typically names whose vols trade in the teens, it's just recently that you're seeing a pickup in volatility," the analyst said.

Tanger, Retail Ventures plan deals

Tanger became the latest REIT to offer a convertible deal on Thursday, announcing a $100 million sale of 20-year exchangeable senior notes, with talk for a coupon of 3.45% to 3.95% and an initial conversion premium of 17.5% to 22.5%.

The convertibles are offered at par and are expected to price Thursday after the market closes. Tanger will guarantee the notes, which will be issued by Tanger subsidiary Tanger Properties LP.

There is a greenshoe option for a further $15 million.

Citigroup and Banc of America are the bookrunners for the registered off-the-shelf offering.

Tanger, a Greensboro, N.C.-based real estate investment trust that owns 29 factory outlet retail malls in the United States, said it will use the proceeds of the deal to pay down its revolving loans and other debts, to make additional investments and for general purposes.

Not all new deals are coming from REITs. Discount retailer Retail Ventures' $125 million of five-year mandatory senior notes exchangeable into DSW Inc. common stock is also expected to price Thursday after the closing bell.

The exchangeables are talked at a coupon of 6.125% to 6.625% and an initial conversion premium of 27.5% to 32.5%. There is a greenshoe option for a further $18.75 million.

Lehman Brothers is the bookrunner for the registered off-the-shelf offering.

Shares of Columbus, Ohio-based DSW (NYSE: DSW), a subsidiary of Retail Ventures that sells branded footwear, closed at $27.55 on Wednesday, down by 3.03% or 86 cents.

Retail Ventures, which is also based in Columbus, Ohio, plans to use the proceeds of the deal to pay down its existing revolving loan and other debt.

Amkor sweetener in doubt

Amkor's 2.5% convertible due 2011 gained slightly on Wednesday after the company delayed its financial report, but hopes of a quick gain were tempered by concerns that a sweetener or acceleration would be a long shot.

The convertible traded up about 2 points at 81.875 against a stock price of $5.625. Amkor stock (Nasdaq: AMKR) fell 5.15% or 30 cents to close at $5.52.

Chandler, Ariz.-based Amkor, a provider of semiconductor assembly and test services, on Wednesday delayed the filing of its quarterly results, citing an ongoing review of it stock options granting practices.

"The normal pattern that these things go through is...if the bonds in question are trading below par, they move toward par," a sellside convertible bond analyst said. "But in the case of Amkor, you've got a lot of straight debt and a credit that isn't very strong - the company doesn't have the liquidity that it needs to accelerate that much debt. So it remains to be seen what's going to happen."

"It raises an issue for the fives too," the analyst said, referring to Amkor's 5% convertible due March 2007. "Because those are very close to maturity, and those might have the opposite effect, if those [investors] think that they might have a problem paying back when they mature."

The 5% convertible slipped about ¼ point on Wednesday, changing hands at 98 versus a $5.625 stock price.

Amkor's high-yield bonds have "fairly strong protection requiring the company to file on time," but its 2.5% convertibles lack such specific requirements on filings, said Michael Knox of Xtract Research, which maintains a database of legal documents related to fixed-income securities.

If Amkor cannot file its report on time and risks a default on the high-yield notes, the company is likely to work with holders of the high-yield paper to avoid acceleration, Knox said. Cross-default language could place the company in default for the 2.5% convertible if it defaults on the high-yield debt, but such an outcome is unlikely to benefit convertible holders especially since the debt they hold ranks the most junior, Knox added.

"Our best guess is they will either file the 10-Q before acceleration is permitted or work with high yield holders to avoid an acceleration," Knox said. "In either case, there doesn't seem like much for 2.5% convert holders."

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