KeyCorp, Medtronic lower; SBA adds on debut; Alexandria prices upsized $225 million deal

By Rebecca Melvin

New York, April 21 - The convertibles market was relatively quiet on Tuesday, with sellers again dominating what action there was after profit taking set in on Monday, convertibles players said.

"Once people are in the mood to take profits, that keeps up for a few days," a New York-based sellsider said.

The sellsider also said the market was quiet "like a midsummer day."

KeyCorp convertible perpetual preferred shares were lower after the regional bank reported a wider net loss and missed consensus, but said it doesn't rule out an exchange offer for its preferreds.

Huntington Bancshares, which exchanged common shares for some of its 8.5% convertible preferreds last month, also reported a quarterly loss, while US Bancorp's first quarter net income dropped 51% as the holding company for U.S. Bank NA boosted loan loss provisions.

The convertibles for both of those financials weren't heard in trade, but Huntington's convertibles were indicated lower and US Bancorp's were indicated flat to slightly higher.

Medtronic Inc. convertibles were down by about 0.5 point as selling hit that name.

The new SBA Communications Corp. 4% convertibles, which priced late Tuesday, debuted in secondary trading and closed at 102.

Another new issue, this one from Alexandria Real Estate Equities Inc., emerged during the session.

Alexandria priced an upsized $225 million of 20-year convertible senior notes after the close, marking the second issue from a real estate investment trust in as many weeks.

The two REIT issues raised questions among players about whether the market for REIT issues had "reopened," and about which other REITs were likely to raise capital through convertibles.

"People are asking who has raised money and who hasn't. If they haven't, can they issue a convert or equity, straight debt or some other form of marketing," a New York-based sellsider said, describing the Alexandria issue as a small deal that was offered-only in the gray market before pricing.

Even though equities markets, led by financials, started the session lower, and then pulled higher following comments by U.S. Treasury secretary Timothy Geithner on banks to a congressional panel that cheered investors, convertibles were mainly unmoved by the switch.

KeyCorp lower

KeyCorp's 7.75% series A non-cumulative perpetual convertible preferred stock traded between 65 bid, 67 offered, which was down compared to previous levels at about 70.

Shares of Cleveland-based KeyCorp moved higher following Geithner's assertion that U.S. banks have plenty of capital, but they still ended lower by 35 cents, or 5%, at $7.05.

The bank reported a wider net loss, missed consensus estimates, reduced its dividend to a penny per share, and did not rule out an exchange offer for its convertible preferred shares.

It reported a first quarter loss of $556 million, or $1.09 a share, compared to a loss of $534 million in the prior quarter, and said that asset quality continues to deteriorate.

By segment, community banking results were lower, while national banking showed a narrower net loss. Provisions were higher and net interest income was lower, while fee income rose and expenses were lower.

CreditSights, an independent credit research firm, noted that KeyCorp has a sizable exposure to commercial real estate and construction lending, which is somewhat larger than average compared with most regional banks. Investors are concerned that commercial lending may lag retail real estate and may show further weakness.

CreditSights downgraded the company to BBB+, citing credit quality weakness driven by commercial and commercial real estate.

SBA gains to 102

The newly priced SBA Communications' 4% convertibles due 2014 traded during the session at 101 and were seen at the close at 101.75 bid, 102.25 offered, according to a syndicate source.

Shares of the Boca Raton, Fla.-based wireless infrastructure company settled up by nearly 1%, or 23 cents, to $25.03.

"People liked it," a sellsider said of the deal that was upsized by $100 million to $450 million in size.

The sellsider surmised that some of the selling hitting convertibles in the last two days was due in part to "people making room for new issues."

Alexandria upsizes

Alexandria Real Estate priced an upsized $225 million of 20-year convertible senior notes after the market close, which was priced at the wides to yield 8% with a 15% initial conversion premium.

The deal was initially talked at $175 million in size.

"It's a small deal that's not all that interesting. It was offered at 102. If it gets offered at 99, I'll start waking up," a sellsider said of the offering ahead of pricing Tuesday.

The notes are non-callable for five years, with puts in years five, 10 and 15. The notes will have net share settlement.

Proceeds are expected to be used to reduce borrowings under an existing credit facility, as well as for selective redevelopment or development of life science properties.

Pasadena, Calif.-based Alexandria is a real estate investment trust that focuses on offices and laboratories that are leased to research entities and government agencies.

CreditSights, which has previously recommended that investors remain underweight on REITs except for the very highest quality, such as Boston Properties, Simon Property Group and ProLogis, remained essentially unchanged in its view.

"Our investment thesis remains very similar although "highest quality" to us now means superior liquidity followed by high quality assets and strong management teams," CreditSights analyst Craig Gutterplan told Prospect News Tuesday.

Alexandria Real Estate and Digital Realty Trust, which priced $260 million of 5.5% convertibles last week, are smaller and focus on more niche real estate opportunities than the traditional property sectors which Boston Properties (office), Simon Property (retail), and ProLogis (industrial) operate in, Gutterplan said, adding that CreditSights doesn't cover Alexandria or Digital Realty closely so it cannot comment on their financial condition.

A buysider said: "Digital Realty is a niche name. The stock sometimes is driven more by IT spending than general real estate and macro trends because they build and lease data centers. They are not investment grade, I think they are about a BB equivalent."

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Mentioned in this article:

Alexandria Real Estate Equities Inc. NYSE: ARE

KeyCorp NYSE: KEY

Huntington Bancshares Inc. Nasdaq: HBAN

Medtronic Inc. NYSE: MDT

SBA Communications Corp. Nasdaq: SBAC

U.S. Bancorp NYSE: USB

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