Alliant up on debut; National Retail deal panned; Lucent gains on deal nod; Beazer better for hedges

By Kenneth Lim

Boston, Sept. 7 - New issues dominated the convertible bond market on Thursday, with Alliant Techsystems Inc. gaining slightly on its debut on the back of the company's improved guidance.

National Retail Properties Inc.'s planned $125 million deal was panned as another real estate investment trust offering with an unattractive yield, and expectations were for pricing on the cheap end of talk.

Lucent Technologies Inc. improved after the planned merger with Alcatel was approved by shareholders on both sides, raising confidence of a better credit profile for the company's debt securities.

Beazer Homes USA Inc.'s 4.625% convertible due 2024 fell just over a point outright, but was better on a hedged basis after the company lowered its 2006 profit forecast.

The convertible was marked at 103.75 bid, 104.5 offered against a stock price of $37.30 late Thursday. Beazer Homes stock (NYSE: BZH) fell 2.71% or $1.04 to finish at $37.33.

"Basically they reported lowered guidance, bad news today...the stock got hit," a convertible bond trader said. "But guys that had been set up on a heavy delta were pretty happy."

Atlanta-based Beazer said it now expects 2006 profit of $8 to $8.50 per share, down from an earlier forecast of $9.25 to $9.75 per share. That earlier guidance, given in July, was also a cut by the housing developer.

The trader said Beazer is an example of what many convertible investors in real estate names are expecting at some point.

"It's a bigger theme, a play on the housing bubble," the trader said. "This is basically what everyone was expecting to happen."

Meanwhile, Headwaters Inc.'s 2.875% convertible due 2016 continued to be active but slipped slightly with the stock, which continues to languish despite some views that the shares are cheap.

The convertible traded at 97.25 against a $21.40 on Thursday, about 1.5 points lower outright than week-ago levels. Headwaters stock (NYSE: HW) closed at $21.08, down by 0.19% or 4 cents.

"It looks like a very, very cheap stock," the convertible trader said. "It's come in a lot, so people from an outright perspective are looking at this, as well as form a swap perspective."

The trader said some investors see South Jordan, Utah-based Headwaters, which provides technology for coal-based alternative energy solutions, as a hedge against oil prices.

"Headwaters is kind of like a hedge against oil, so as oil comes in, Headwaters customers will do better," the trader said.

Alliant gains from the start

Alliant's newly priced 2.75% convertible senior subordinated note due 2011 gained more than a point outright on Thursday after it was priced within talk.

The convertible was 100.75 bid, 101.125 offered against the previous closing stock price of $77.83 early Thursday, but moved up to 101.625 bid, 101.875 offered versus a $78.75 stock price later in the day. Alliant stock (NYSE: ATK) closed at $79.03, a gain of 1.54% or $1.20.

The $270 million of notes were offered at par and priced Wednesday after the market closed. Price talk was for a coupon of 2.5% to 3% and an initial conversion premium of 20% to 25%.

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

Bank of America was the bookrunner for the Rule 144A offering.

Alliant, an Edina, Minn.-based defense contractor, said it will use the proceeds to buy back $100 million of its own stock, to contribute to its defined benefit pension plan and for other general purposes. The company is also entering into convertible note hedge and warrant transactions.

A sellside convertible bond trader noted that the new deal's structure appeared slightly better than Alliant's existing 3% convertible due 2024, but the older paper held up well.

"It was interesting that it's a new convert that falls inside of outstanding paper, like the 3%, which can be called in 2014," the trader said. "If I was a holder of the 3%, I'd be a little unhappy...The company issues paper that matures inside of me, the company's credit would suffer somewhat, and someone gets in front of me to get paid. You would think that the 3% would get softer and come in, but they seemed to hold up."

The 3% convertible traded at 118 against the previous stock price of $77.83 early Thursday, about 1/8 point higher outright.

A convertible bond analyst said the new issue appeared "a little bit on the rich side" using a conservative credit spread that the analyst acknowledged may have been a little wider than some investors are using.

"It seems like all the ATK converts have tended to be a little bit on the rich side, but they set up OK," the analyst said. "Nobody worries about the credit. Because of the business that they're in, they're a market leader, they have decent market cap, there's no concern about their funding even if they're leveraged. Especially since they raised their guidance a little bit today for the fiscal year."

Alliant on Thursday said it expects 2007 earnings to be between $4.90 and $5.05 per share, up from earlier guidance for between $4.85 and $5 per share. The company also announced a $100 million stock buyback plan for about 1.25 million shares.

The analyst said that because the company's overall credit is fine despite its high debt levels, there is "a little bit of disconnect" between Alliant's credit spread and how the bonds trade. "It is a B credit with a lot of leverage...I guess it just becomes how much tighter than other B credits should it trade," the analyst said.

As for comparisons between the new convertible and the older 3% notes, the analyst said the return profiles are quite similar, although some investors might prefer the newer issue.

"The new ones look a little bit cheaper than the 3s, and it's probably better to be shorter rather than longer," the analyst said.

National Retail deal panned

National Retail's planned $125 million of 20-year convertible senior notes were quiet in the gray market on Thursday, with the high common dividend taking out some of the shine from the deal.

"I would say this one is probably going to come near the cheap end for the simple reason that the common pays over 6%, so even at the cheap end you have a negative yield advantage of over 200 basis points," a sellside convertible bond analyst said.

National Retail's notes were talked at a coupon of 3.75% to 4% and an initial conversion premium of 15% to 17.5%.

There is an over-allotment option for a further $18.75 million.

Citigroup and Merrill Lynch are the bookrunners of the registered off-the-shelf deal.

National Retail, an Orlando, Fla.-based real estate investment trust that develops retail property in the United States, said it plans to use the proceeds of the deal to repay about $202.6 million of revolving debt due 2009 that current carries an interest of Libor plus 0.8%.

"Another day, another REIT," the analyst quipped.

While the convertible modeled just over 1% cheap at the midpoint of talk, its pricing is comparable to recent REIT issues, the analyst said.

"The outrights are going to have a problem with it because of the income disadvantage," the analyst added. "The hedge funds may be interested on an implied volatility basis, with the bond floor around 90, 91."

Lucent improves with deal

Lucent's convertibles improved slightly on Thursday after a merger with Alcatel was approved by shareholders of both companies.

Lucent's 2.75% convertible due 2025 traded at 97.75 versus a $2.25 stock price on Thursday, about a point above Wednesday's levels. The 2.75% convertible due 2025 changed hands at 98.875 against a stock price of $2.29 on Thursday, just less than a point above the previous day's levels. Lucent stock (NYSE: LU) closed at $2.25, down by 0.88% or 2 cents.

The merger between the two companies, which will be accomplished through a share-swap valued at about $10.7 billion, received the go ahead from shareholders of the telecommunications equipment makers on Thursday. Murray Hill, N.J.-based Lucent's chief executive, Patricia Russo, will lead the combined group out of its headquarters in Paris, where Alcatel is now based.

"I think it was really important," a sellside convertible analyst said of the voting. "There was some concern that some of the Alcatel shareholders would be against it. I think a significant portion of Alcatel was held by some hedge funds who could have been against the deal, so it definitely was a positive."

The analyst said the merger is better for Lucent bondholders, who will now benefit from Alcatel's stronger credit profile. But both 2.75% convertible series, which do not have dividend protection, may take a hit if Alcatel raises the dividend payout for the combined company. Lucent's 7.75% convertible preferred, which investors are hoping will be called in March 2007, will also benefit from greater confidence in the company's credit.

Based on information from the company, none of the convertibles may be put back to the company in relation to the change of control, because the consideration of the merger is all stock, the analyst noted.

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