Arris deal climbs on debut; Hornbeck bid up, Inland silent in the gray; JetBlue rises on upgrade

By Kenneth Lim

Boston, Nov. 7 - New issues dominated the convertible bond market on Tuesday, with Arris Group Inc.'s upsized offering making larger than expected gains after arriving at the rich end of talk.

Hornbeck Offshore Services Inc.'s planned $200 million offering was bid up in the gray market as investors took warmly to the company's strong credit and relatively volatile stock.

Inland Real Estate Corp.'s expected $150 million deal, however, failed to draw any bids in the gray market despite views that price talk appeared fairly attractive.

Meanwhile, JetBlue Airways Corp. gained as lower fuel costs and a stock upgrade helped lift the budget airline. JetBlue's 3.5% convertible due 2033 was marked a point higher at 94.125 bid, 94.625 offered against a stock price of $13.05. JetBlue stock (Nasdaq: JBLU) gained 5.31% or 66 cents to close at $13.09.

"The stock's doing really well," a sellside convertible bond trader said. "The convertibles don't look very cheap at the moment, but people who are holding them now are probably just waiting to put them back in a year...and the company's credit may be improving because the company said last month that it doesn't need to raise cash and it's cutting its growth."

Raymond James equity analyst Buck Horne on Tuesday upgraded JetBlue stock to outperform from market perform, citing signs of stronger bookings for the winter. Forest Hills, N.Y.-based JetBlue's October unit revenue growth was also stronger than other domestic airlines, Horne wrote in a note. Also on Tuesday, JetBlue priced $124 million of seven-year enhanced equipment trust certificates, of which $74.1 million bear an interest rate of Libor plus 23 basis points and $49.4 million bear a Libor plus 287.5 bps rate.

Arris makes strong debut

Arris' new 2% convertible senior note due 2026 gained about a point outright on Tuesday, surprising some investors on the upside after the deal was enlarged and priced near the rich end of talk.

The convertible, which was offered at par, traded at 101 against a stock price of $11.45. Arris stock (Nasdaq: ARRS) slipped 0.17% or 2 cents to close at $11.47.

"I was very surprised," a buyside convertible bond trader said. "We played it, we flipped it, but I was surprised that it came up so much."

Arris on Monday priced the upsized $240 million offering at a coupon of 2% and an initial conversion premium of 40%. The notes, which priced after the market closed, were talked at a coupon of 2% to 2.5% and an initial conversion premium of 35% to 40%.

There is an over-allotment option for a further $36 million.

The size of the deal was originally $225 million, with a greenshoe of a further $33.75 million.

UBS Investment Bank and Deutsche Bank Securities were the bookrunners of the registered off-the-shelf offering.

Arris, a Suwanee, Ga.-based maker of broadband communications equipment, said the proceeds of the deal will be used for general purposes, which includes future acquisitions.

The trader said the gains may have been fueled by a lack of new convertibles.

"Probably because there's been a lack of new paper, not enough new paper coming, and if something looks remotely interesting people are going to go for it," the trader said. "I don't feel there's a lot of room for the Arris to expand beyond that."

A sellside convertible bond analyst also said the deal's debut was stronger than expected.

"I was surprised at how well it traded," the analyst said. "I think it's a little expensive for the volatility, but it looks like people are willing to pay for it."

The analyst noted two possible concerns about the company's credit quality.

"There are two credit issues," the analyst said. "(A) What are they going to do with all the cash? They're talking about an acquisition, so as long as they have something in mind, there's a question mark. Also, the other problem is customer concentration. These are potential questions marks. The numbers look good, the balance sheet is solid, but these are overhangs, I guess."

Hornbeck higher in gray

Hornbeck's planned $200 million of 20-year convertible senior notes was bid about 0.75 point higher in the gray market on Tuesday, ahead of expected pricing after the market closed.

The deal was talked at a coupon of 1.625% to 2.125% and an initial conversion premium of 32.5% to 37.5%. The notes will be offered at par.

There is a greenshoe option for a further $30 million.

Jefferies & Co. and Bear Stearns are the bookrunners of the Rule 144A offering.

Hornbeck, a Covington, La.-based provider of offshore supply vessels to the oil and gas industry, said part of the proceeds will be used to fund convertible note hedge and warrant transactions. The company also earmarked 30% of the proceeds to buy back its common stock, and for general purposes that could include acquisitions.

"It's an interesting deal at 1.875%, up 35%," a buyside convertible bond trader said. "I don't think it's great, but it's a good stock and a good company, I think they'll be good to buy."

The trader noted that the strong debut of Arris' new paper suggested that the market may also take to the new Hornbeck convertibles.

"In light of how ARRS came in this morning, I think that the HOS should do well as well," the trader said. "Even though they're different industries, they're both seven-year papers, similar credit, similar structure. It looks like it might do well."

But the trader, who thinks current interest in Arris' new convertible may trickle off, was not sure how well Hornbeck's convertible would be able to sustain any gains it makes on its debut.

"I won't be surprised if it trades up a couple of points," the trader said. "But will it hold long term? Probably not."

A sellside convertible bond analyst said investors were likely interested in the volatility of Hornbeck common stock.

"This is a pretty good credit, and there's decent volatility, so you're probably going to see decent interest there," the analyst said.

Inland quiet in the gray

Inland Real Estate's planned $150 million of 20-year convertible senior notes did not trade in the gray market on Tuesday, as investors described the deal as unexciting despite reasonable pricing.

The deal was expected to price after the market closed, and talk guided for a coupon of 4.125% to 4.625% and an initial conversion premium of 15% to 20%.

The convertibles will be offered at par.

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

Wachovia Securities is the bookrunner of the Rule 144A deal.

Inland Real Estate is an Oak Brook, Ill.-based real estate investment trust that owns and operates neighborhood retail centers and community centers primarily in Oak Brook. It will use the proceeds of the deal to buy back up to $50 million of its own common stock, pay back an existing loan with Key Bank National Association and for general purposes.

"It looks OK at the mids, but there's nothing too exciting about it," a sellside convertible bond analyst said.

The analyst reckoned that both outright and hedge investors would be interested in the deal.

"You'll probably get a good combination of both," the analyst said. "We've seen the hedge guys make money the last couple of weeks in every sector with the stocks getting hit, and there should be good outright interest in the yield."

A buysider agreed that the Inland offering looked decent, but was not sure that the market had enough appetite for another REIT.

"The market is just so inundated with REITs," the buysider said. "Will it trade at par? It probably will, but it's not that exciting."

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