Cypress, Developers Diversified rise on debuts; West Pharmaceutical, PrivateBancorp quiet in gray

By Kenneth Lim

Boston, March 8 - Cypress Semiconductor Corp. improved right off the bat on Thursday amid keen interest in its newly priced convertibles.

Developers Diversified Realty Corp. also rose on its debut after its deal was upsized and priced within talk.

West Pharmaceutical Services Inc. and PrivateBancorp Inc. raised eyebrows for the unusual structures of their planned offerings, although both were quiet in the gray market ahead of pricing expected after the market closed.

Cypress takes off

Cypress' new 1% convertible senior note due 2009 rose more than a point on Thursday as optimism about the volatility of the stock buoyed the new piece of paper.

The convertible was at 101.375 bid, 101.625 offered against a stock price of $18.89. The newly priced note was offered at par. Cypress stock (NYSE: CY) closed at $19.22, up by 1.75% or 33 cents.

"Those were active in the morning, traded up right off the bat," a buyside convertible trader said. "A lot of guys wanted to play this."

Cypress priced its $500 million offering on Wednesday after the market closed at an initial conversion premium of 26.5%. It was talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $100 million.

Credit Suisse was the bookrunner of the Rule 144A offering.

Cypress, a San Jose, Calif.-based semiconductor manufacturer, said the proceeds of the deal will be used to buy back shares of its common stock and to fund convertible note hedge and warrant transactions.

"It traded up, closer to a 34-ish vol," a sellside convertible strategist noted. "It's somewhat interesting. I think that looking at the vol in the name, it's historically been in the mid 30s, but if you look at the options, it's in the low to mid 20s. If you think the options market is a better indication, which I think a lot of people were thinking, you wouldn't think it would go up so much. But in this case it's around the mid-30s, which suggests that people are looking at historical vol."

A buyside convertible analyst said hedge investors would have liked the deal.

"If you're outright, the yield's probably a little too low to be interesting," the analyst said. "But hedge guys can set it up quite easily. It's a good credit and it's got high volatility."

Developers Diversified gains

Developers Diversified's new 3% convertible senior unsecured note due 2012 rose about half a point outright after the company upsized the deal.

The convertible traded at 99 against a stock price of $62.30 early Thursday. The convertible was reoffered at 98.5 in the offering.

Developers Diversified's older 3.5% convertible due 2011 gained about three-eighths of a point outright. It traded at 107 against a stock price of $62.30. Developers Diversified stock (NYSE: DDR) rose 1.22%, or 76 cents, to close at $63.05.

"There was some traded early in the morning, but it died down after that," a sellside convertible trader said of the newer notes.

Developers Diversified priced the upsized $600 million of convertible senior unsecured notes on Wednesday after the market closed, at an initial conversion premium of 20%. Price talk guided for a coupon of 2.75% to 3.25%, an initial conversion premium of 20% and a reoffered price of 98.5.

The size of the deal was originally $400 million with an additional over-allotment option of $60 million. There is no longer any greenshoe.

Banc of America, JP Morgan and Wachovia were the bookrunners of the Rule 144A offering.

Developers Diversified, a Beachwood, Ohio-based real estate investment trust that focuses on shopping centers, said it will buy back $117 million of its common stock using the proceeds of the deal. It will also use the proceeds to repay outstanding senior unsecured debt, to fund convertible note hedge transactions and for general purposes.

"I think it came out OK," a sellsider said. "Compared to the existing bonds, it's not a bad deal, at least where they were reoffered."

A convertible analyst said the deal modeled about fair during price talk.

"It's a similar structure to their 3.5s," the analyst said. "It's a pretty straightforward deal. I thought it was just fair, so I didn't spend too much time on it. If you were already holding the 3.5s, there's not a lot of reason to buy these."

West Pharmaceutical quiet in gray

West Pharmaceutical's planned $150 million offering of 40-year convertible junior subordinated debentures was quiet in the gray market on Thursday as critics panned its unusual structure.

The convertible was talked at a coupon of 3.5% to 4% and an initial conversion premium of 30% to 35%. Pricing was expected after the market closed. West Pharmaceutical stock (NYSE: WST) closed at $42.32, down by 8.2% or $3.78.

The convertibles were offered at par.

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

UBS Investment Bank is the bookrunner of the registered off-the-shelf offering.

West Pharmaceutical, a Lionville, Pa.-based maker of closure systems and syringe components for use with injectable drugs, said the proceeds of the deal will be used for general purposes.

A convertible strategist said the deal's long structure and lack of puts may deter some investors.

"I don't like the structure," a convertible strategist said. "BTU [Peabody Energy Corp.] is one deal I can think of with a similar structure. But [with] BTU they're a big, well-known coal company. West Pharmaceutical is kind of a smaller player. At a spread of low 300s over Libor, it doesn't look that good. With a 30% vol, it looks expensive."

Another convertible analyst used a similar credit spread, but thought that the volatility could be higher.

"They don't have very liquid options, but where the options have traded it's probably slightly higher than 30%," the analyst said. "And also lately people have been bidding up vol just in general. A lot of deals seem to be getting bid up after they come to market, and you kind of have to artificially incorporate that."

PrivateBancorp seen as unusual

PrivateBancorp's planned $70 million of 20-year convertible senior notes was also quiet in the gray market on Thursday, but analysts described the deal as interesting.

The deal was expected to price after the market closed. It was talked at a coupon of 3.375% to 3.875% and an initial conversion premium of 22.5% to 27.5%.

The notes were offered at par. PrivateBancorp stock (Nasdaq: PVTB) slipped 0.31%, or 11 cents, to close at $35.33.

There is an over-allotment option for a further $10.5 million.

RBC Capital Markets is the bookrunner of the Rule 144A offering.

PrivateBancorp, a Chicago-based banking services company, said it will use the proceeds to pay back up to $41.5 million of existing senior debt, to buy back up to $10 million of its common stock and for general purposes.

"I think this is pretty interesting," a buyside convertible trader said. "I like the two-year structure and the coupon and premium look good. It'll probably do well."

A sellside convertible analyst said the deal looked like it "will do fine."

"It's got a good, short structure, easily achievable at maturity," the analyst said. "You got relatively low vol, but I like the structure, although I don't understand why it's putable at year 2."

Another analyst said the deal modeled around 2% cheap at the midpoint of talk.

"It's a short-dated paper, which is kind of attractive," the analyst said. "It's got a strange structure...but beyond that it looks like they're trying to basically issue a bond with a cheaper coupon here. The bond value is very high, and it's just two years, so the bond value is very high whereas the option portion is not as high as other convertibles."

The two analysts were using credit spreads between 150 basis points over Libor and 200 bps over Libor and volatility in the 20% to 30% range.

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