Headwaters rises at start; Vornado flat on rumors; Washington quiet; Isis, National Financial reviews differ

By Kenneth Lim

Boston, Jan. 17 - Headwaters Inc. surged a few points higher on its debut to lead an otherwise quiet convertible market on Tuesday.

Headwaters' new convertible was upsized and priced late Tuesday at the rich end of talk.

Vornado Realty Trust was flat, as the stock swung around on reports - confirmed by the company later in the day - that it was bidding for rival real estate investment trust Equity Office Properties Trust.

Washington Real Estate Investment Trust was quiet after the company priced an upsized $135 million add-on to its 3.875% convertibles due 2026 at a slight discount to market prices.

Although both deals by Isis Pharmaceuticals Inc. and National Financial Partners Corp. were absent in the gray market, the receptions for their offerings were starkly different. Isis' deal was believed to have been oversubscribed and described as cheap, while National Financial Partners' offering modeled rich for some analysts.

XM Satellite Radio Holdings Inc.'s 1.75% convertible due 2009 slipped about ¼ point outright but improved on a dollar-neutral basis after an official's comments weakened hopes of a merger with rival Sirius Satellite Radio Inc.

XM's convertible traded at 86.25 against a stock price of $15.70. XM stock (Nasdaq: XMSR) fell 9.86% or $1.69, most of it in the afternoon, to end at $15.45.

"The stock's getting whacked because the FCC just said they couldn't merge with Sirius," a buysider said. "The XM converts are holding up. They were never really affected that much by the speculation in the first place. The credit's still the same."

U.S. Federal Communications Commission chairman Kevin Martin on Tuesday said the current licenses held by Washington-based XM and New York-based Sirius did not allow a merger between the two satellite radio providers. Both companies have seen their stocks gain the past couple of months over speculation of a merger.

The convertible market in general was languid, as mixed corporate earnings gave equity markets a sense of uncertainty.

"It feels like a slow day," a sellside convertible bond trader said.

Headwaters starts with surge

Headwaters' new 2.5% convertible senior subordinated notes due 2014 opened at 102.5 against a stock price of $23.12 on its first day of trading, passing its par offer price.

"They did pretty well," a sellside trader said.

The upsized $135 million offering priced with an initial conversion premium of 27.5% at the rich end of talk. Price talk was revised to a coupon between 2.5% and 2.75% and an initial conversion premium between 25% and 27.5% on Tuesday amid strong demand for the deal. Original price talk was for a coupon of 2.5% to 3% and an initial conversion premium of 22.5% to 27.5%.

Headwaters stock (NYSE: HW) eased 1.38% or 32 cents to close at $22.80.

The size of the deal was originally $125 million. The over-allotment option for a further $25 million remains the same.

Morgan Stanley, JP Morgan and Deutsche Bank are the bookrunners of the Rule 144A offering.

Headwaters, a South Jordan, Utah-based provider of energy and construction products and technologies, said the net proceeds of the offering will be used to pay off part of a senior secured credit facility. It is also concurrently entering into convertible note hedge and warrant transactions.

"Right off the bat, it was kind of between 102 and 103," a sellside convertible strategist said. "People liked the volatility-spread combo. It's a high-30s volatility name from a couple of quarters ago, and there are benchmarks for credit out there that get to the 350 basis points over Libor area."

Vornado flat on bid talk

Vornado's 3.625% convertible due 2026 was mostly unchanged to modestly lower on Wednesday amid early uncertainty about speculation that the company would be bidding for rival Equity Office Properties.

The convertible traded at 100.875 against a stock price of $126. Vornado stock (NYSE: VNO) closed at $122.55, lower by 2.68% or $3.38.

"Vornado was active this morning," a buyside convertible trader said. "I don't know how it's going to play out. It'll depend on if and how they bid for Equity Office."

Reports late Tuesday and early Wednesday said New York-based Vornado, a real estate investment trust, would make a competing bid for Chicago-based Equity Office. Equity Office in November agreed to a $20 billion privatization bid by private equity firm Blackstone Group.

Vornado said after the market closed that it is submitting a joint $21.6 billion cash-and-stock offer with real estate veterans Barry Sternlicht of Starwood Capital Group Global LLC and Neil Bluhm of Walton Street Capital LLC.

The consortium is offering $52 per Equity Office share, of which 60% will be in cash and 40% in Vornado stock. Vornado will take about half of Equity Office's assets in the major east and west coast markets, while Starwood and Walton will take the rest. Vornado expects to fund its share of the acquisition by issuing $10.6 billion of shares and the rest in debt.

A sellside convertible analyst said before the offer announcement was made that Vornado's credit will depend on how the bid was structured.

"It would sort of depend on how they were raising the funding and what kind of a role they would play," the analyst said. "I didn't see a lot of detail in the [earlier] reports."

Washington deal quiet on debut

Washington Real Estate Investment Trust's upsized $135 million add-on to its 3.875% convertible senior note due 2026 was quiet after the deal priced at a slight discount to market prices.

The convertible, which has the same terms and structure as the company's outstanding 3.875% convertible senior notes due 2026 and issued in September 2006, was offered at 100.5. The convertible last traded at 101.5 against a stock price of $40.90 on Jan. 12.

Washington stock (NYSE: WRE) declined 1.97% or 81 cents to close at $40.36 on Wednesady.

"I haven't really seen anything on them," a sellsider said.

The size of the add-on was originally $125 million. The over-allotment option was reduced from an additional $18.75 million to $15 million.

Credit Suisse is the bookrunner for the registered off-the-shelf offering.

Washington, a Rockville, Md.-based real estate investment trust with properties in the greater Washington/Baltimore metro region, said it will use $69 million of the proceeds to repay debt, and the remainder for general purposes.

Isis seen as cheap

Isis Pharmaceuticals' planned $125 million of 20-year convertible subordinated notes were expected to attract strong interest with the deal described as very reasonably priced.

"I haven't seen anything [in the gray market], but I've been told that it's oversubscribed," a sellside convertible trader said.

The offering was expected to price Wednesday after the market closed. It was talked at a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

The notes were offered at par. Isis stock (Nasdaq: ISIS) fell 6.87% or 83 cents to $11.25.

There is an over-allotment option for a further $37.5 million.

Lehman Brothers is the bookrunner of the Rule 144A offering.

Isis, a Carlsbad, Calif.-based drug maker whose products cardiovascular, metabolic, inflammatory and ocular diseases and cancer, said it will use the proceeds of the deal to buy back its 5.5% convertible subordinated notes due 2009 and for general purposes.

"That one looks good," a sellside convertible strategist said. "There were some borrow issues earlier apparently, but it looks like it's gone away, so it should do well."

The strategist said that, depending on the volatility assumption, the convertible modeled between one to three points cheap. Although it might be a little risky as an outright investment, the convertible seemed attractive as a hedge play.

"It's kind of a good mid-stage biotech," the strategist said. "You've got room for credit tightening, and if things work out it's a pretty volatile name for swaps."

National Financial meets resistance

National Financial Partners' planned $200 million of five-year convertible senior notes appeared to be too rich for some analysts ahead of its expected pricing Wednesday evening.

"It's pretty ugly," a sellside strategist said.

The deal was talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 20% to 25%. The notes were offered at par. National Financial Partners stock (NYSE: NFP) rose 5.02% or $2.25 to close at $47.10.

There is an over-allotment option for a further $30 million.

Goldman Sachs and UBS Investment Bank are the bookrunners for the registered off-the-shelf offering.

Some National Financial Partners common stockholders will concurrently sell 1.6 million common shares. The company will not receive any of the proceeds from that stock sale.

National Financial Partners, a New York-based financial services provider, said it will use the proceeds of the deal to buy back about 2 million shares of its common stock from Apollo Investment Fund IV LP and Apollo Overseas Partners IV LP The proceeds will also fund convertible note hedge and warrant transactions and pay down existing debt.

"We had it modeled correctly, and at the cheap end of price talk it may work, but it doesn't leave much room to make any money," the convertible strategist said. "I'd be interested in how it goes."

A sellside convertible analyst said the deal modeled about half a point rich at the midpoint of talk using a volatility assumption in the mid-to-high 30s. That volatility was on the high side, the analyst added.

"It's not that it's a bad company," the analyst said. "It's just that you have to price it with the right volatility. Looking at it historically, it looks to me like it's [volatility] somewhere in the mid-30s. But I know some people are saying that based on what the company's business is, they thought a more conservative volatility may be more appropriate."

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