LeCroy, Diodes gain after rich pricing; HRPT, United Dominion improve; Cypress rises on buyout hopes

By Kenneth Lim

Boston, Oct. 6 - The convertible bond market had an active session for a Friday, with a number of new deals getting the thumbs up from investors.

LeCroy Corp.'s new 4% convertible due 2026 gained about a point after it priced at the rich end of talk amid strong subscription rates.

Diodes Inc. was up about 3 points outright on its first day of trading with the offering pricing within a range many investors felt was cheap.

HRPT Properties Trust's freshly minted convertible preferreds also rose as what investors said was its cheap pricing overcame concerns about a real estate investment trust glut.

United Dominion Realty Trust Inc. also started higher, but its modest gains paled in comparison to the other new deals.

Among the older paper, Cypress Semiconductor Corp. improved in line with the stock after Cypress said it was considering strategic alternatives involving itself.

Friday's market in general was more active usual, given the distractions of the coming Monday's Columbus Day holiday and Major League Baseball playoffs.

"For a 2 o'clock close, it's a pretty active day," a sellsider remarked - although only the bond market actually shut for the day at 2 p.m. ET, the stock market carrying on for a full session, in theory, at least.

LeCroy improves on debut

LeCroy's newly priced 4% convertible senior note due 2026 was 101 bid against a stock price of $11.64 early Friday, gaining a point above its offered price of par before the market started.

LeCroy stock (Nasdaq: LCRY) closed at $11.70, up by 0.52% or 6 cents.

"That did pretty well," a sellside convertible bond trader said, adding that concerns about a tough borrow proved unfounded.

LeCroy on Thursday priced its $60 million offering at the rich end of talk, at a coupon of 4% and an initial conversion premium of 25%. The notes were talked at a coupon of 4% to 4.5% and an initial conversion premium of 20% to 25%.

The over-allotment option for a further $12 million was upsized from the original $9 million greenshoe, and market sources said the deal was several times oversubscribed.

Cowen and Co. was the bookrunner of the Rule 144A offering.

LeCroy, a Chestnut Ridge, N.Y.-based communications test equipment, said it will use the proceeds of the deal to repay $32 million of term debt and to buy back up to $10 million of its own stock. LeCroy will also partially repay a revolving loan that was drawn down to fund its acquisition of Catalyst Enterprises Inc, which will be bought with $30 million in cash and a $3.5 million note.

"I thought it looked really cheap at the mid-level," a sellside convertible bond analyst said.

The analyst said the deal may not have appealed as much to outright investors as it did to hedged investors.

"The stock isn't like super compelling, but the convert sets up really well on hedge," the analyst said.

LeCroy has a long track record - it has been around for 40 years and has a loyal base of engineers, the analyst said.

"The credit is decent, and it's a small company, and they could potentially be taken over at some point," the analyst said.

Diodes shines in start

Diodes had the strongest start among the new deals on Friday, gaining about 3 points outright as investors saw enough left on the table to fuel their enthusiasm.

The 2.25% convertible due 2026 was 103.5 bid, 104 offered versus a stock price of $42 on Friday. It was offered to investors at par. Diodes stock (Nasdaq: DIOD) slipped 0.21% or 9 cents to close at $41.79.

"Guys liked this deal from the get go," a sellside convertible strategist said.

Diodes on Thursday priced the $200 million offering at a coupon of 2.25% and an initial conversion premium of 39.68%. Price talk guided for a coupon of 1.875% to 2.375% and an initial conversion premium of 32.5% to 37.5% so the coupon came towards the cheap end while the conversion premium was richer.

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

UBS Securities was the bookrunner of the registered off-the-shelf offering.

Diodes, a Westlake Village, Calif.-based semiconductor manufacturer, said the proceeds of the deal will be used for working capital and other general corporate purposes, including acquisitions.

The convertible strategist said the deal looked cheap during pricing, and may have been helped by the simple fact that the issuer was not a real estate investment trust.

"Observation wise, with the high percentage of REIT deals, when we see non-REIT deals, people have been willing to pay up for tech or biotech exposure," the strategist said.

But at current prices, much of the early attraction may have been priced out.

"At these levels, 200 basis points over Libor, 45% vol seems aggressive," the strategist said.

HRPT beats REIT odds

HRPT's new 6.5% series D convertible preferred rose about half a point early Friday despite grumblings about the recent surge in REIT convertible issuance, as investors describe the offering as extremely cheap.

The convertible was 25.25 bid, 25.75 offered versus Thursday's closing stock price of $11.72. HRPT stock (NYSE: HRP) closed at $11.59, a drop of 1.11% or 13 cents.

"This was probably the most interesting REIT deal this week," a buyside convertible analyst said.

HRPT's upsized $330 million offering priced within talk Thursday after the market closed, at a dividend of 6.5% and an initial conversion premium of 10.9%. The 13.2 million preferred shares were offered at par of $25 apiece, and were talked at a dividend of 6.25% to 6.75% and an initial conversion premium of 10% to 15%.

The size of the deal was originally $250 million, or 10 million preferred shares. The over-allotment option was set at a further $49.5 million, or 1.98 million preferred shares.

Merrill Lynch and Banc of America Securities were the bookrunners of the registered deal.

HRPT, a Newton, Mass.-based real estate investment trust focusing on office and industrial real estate, said it will use the proceeds of the deal to reduce its outstanding revolving debt.

"We liked the HRPs," a sellside convertible bond trader said. "They did pretty well, although people can only hold so much paper from one sector."

The trader said the reason for HRPT's gains on Friday was simple: "Because it's so darn cheap."

United Dominion gains slightly

United Dominion was also higher on its first day of trading, although the market's reception was cooler than that for HRPT.

United Dominion's new 3.625% convertible senior note due 2011 was 99.125 bid early Friday versus the previous stock close of $31.29. The convertible was reoffered at 98.75. United Dominion stock (NYSE: UDR) slipped 0.77% or 24 cents and finished the day at $31.05.

"They priced at the cheap end, but even then it didn't look that great," a buysider said.

United Dominion priced its $250 million deal at the cheap end of talk, at a coupon of 3.625% and an initial conversion premium of 20%, and reoffered at 98.75. Price talk was for a coupon of 3.375% to 3.625% with an initial conversion premium of 20% and a reoffered price of 99.

There is a greenshoe option for a further $37.5 million.

JP Morgan, Merrill Lynch and Wachovia Securities were the bookrunners of the Rule 144A offering.

United Dominion, a Highlands Ranch, Colo.-based real estate investment trust that focuses on mid-market apartment communities, said it used $12.6 million of the proceeds of the deal to fund convertible note hedge and warrant transactions. It will also repay its debt under a revolving loan and fund general corporate purposes.

Cypress up on buyout talk

Cypress's 1.25% convertible due 2008 gained about 4 points outright in line with the stock on Friday after the company said a review of strategic options could include selling the company.

The convertible traded at 140 against a stock price of $19.90 on Friday. Cypress stock (NYSE: CY) closed at $19.59, a gain of 1.24% or 24 cents.

Cypress, which said in July that it was exploring ways to more fully realize its majority stake in SunPower Corp., announced on Friday that it was expanding the review to include strategic alternatives involving the company itself.

"Some people are hoping that they could potentially be hoping to find a buyer for themselves," a convertible bond trader said.

A sellsider was more cautious.

"The whole thing about Cypress is somewhat different," the sellsider said. "They've always talked about monetizing their SunPower investments. Now they could be interested in selling themselves as well, but what company isn't at the right price?"

The sellsider added that "there are multiple examples of companies that have said that in the past" and have not had anything substantial emerge.

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