Financials lift convertibles; Bank of America, Ford, ON Semi gain; four new issues make lackluster debut

By Rebecca Melvin

New York, March 20 - A better credit picture and a snapback in financials helped lift the convertibles market on Thursday, albeit in a quiet session, as volume thinned ahead of the long Easter weekend, market players said.

One player noted that, ironically, convertibles bids went higher immediately after the bond markets closed at 1 p.m. ET.

"As soon as the credit guys left, convertibles rallied, which may point out how short the credit guys are," a New York-based sellside trader said.

"The vol. stuff was better, and the credit stuff was better, better," he said.

A New York-based sellside convertibles trading desk supervisor said, "We were a point better in high yield and about 0.5 point better in investment grade."

Bank of America Corp. and Fannie Mae were obvious gainers in the financial sector, and even SLM Corp., better known as Sallie Mae, and CIT Group Inc. were better, one trader said, although shares of Sallie and CIT dropped amid continuing liquidity concerns.

In technology, the convertible paper of Flextronics International Ltd., ON Semiconductor Corp., and Arris Group Inc., a cable, phone and television services developer, were finding buyers, a West Coast-based sellside trader.

Meanwhile the convertible bonds and preferred shares of Ford Motor Co. were higher in heavy trading.

In the primary arena, four new issues were released for secondary trading. But their debuts did not seem to excite very many players. Especially notable was that all four deals were downsized with pricing coming at the cheap end of talk, or even beyond the cheap end of talk for the coupons.

The new 7% convertible preferreds of Alexandria Real Estate Equities Inc. closed up at $25.625 bid, 25.825 offered on a 3.2% gain on the company's common shares.

Also on Thursday, Medical Properties Trust Inc. announced that it priced $75 million of 9.25% convertibles, NovaGold Resources Inc. announced that it priced $95 million of 5.5% convertibles and Raser Technologies Inc. announced that it priced $50 million of 8% convertibles.

Bank of America, Fannie Mae higher

Richard Bove of Punk, Ziegel & Co. drew a lot of attention Thursday after the well-known financial analyst put out a client note proclaiming that the financial crisis is over and investors should take advantage of a "once-in-a-generation opportunity" to buy bank stocks.

Convertibles players said that the turnaround began earlier this week despite wild gyrations of the stock markets after the Federal Reserve lowered interest rates and took other measures to help pump liquidity into the ailing financial system.

"I'd say it started to improve on Tuesday, and to the extent that the financial side has stabilized there has been a good move upwards in valuation for a change," a New York-based sellside trading desk supervisor said.

"There's still a lot further to go; we suffered about a 5% loss of valuation over a three-week period. There's been a lot of pain."

"There are still concerns. There are concerns of what higher financing costs going up across the Street will mean for valuations and the secondary market, and there are concerns about redemptions, but to the extent that liquidity has improved, maybe the healing process has started," the sellsider said.

The 7.25% convertible preferred shares of Bank of America rose to 1,092.68, versus a stock price of $41.86, compared to a close of 1,038.22 and a stock price of $38.56 on Wednesday.

Shares of the Charlotte, N.C.-based lender (NYSE: BAC) gained 8.56% on the day.

Fannie Mae's 5.375% perpetual convertible preferred shares closed up at 7,300 versus a share price of $34.30. That compared to a close of 7,200, versus a stock price of $30.71 on Thursday. Shares of Washington, D.C.-based Fannie Mae (NYSE: FNM) closed up 12%.

Buyers move on technology names

Flextronics was catching a bid, a lot of ON Semiconductor was trading, and Suwanee, Ga.-based Arris Group was also getting some attention as convertibles players moved on some credit plays, a West Coast trader said.

Whether it will continue, is anybody's guess, but many were optimistic on Thursday.

"If credit does continue to stabilize, the underlying bid is going to get stronger," the trader said.

ON Semiconductor's 1.875% convertibles due 2025 closed at 95.8 versus a stock price of $5.22. That compared to a close of 94.5 versus a stock price of $5.01 on Wednesday.

The On Semiconductor's 2.625% convertibles due 2026 closed at 78 compared to 7.8 on Wednesday; and the 0% convertibles due 2024 closed Thursday at 88.7 compared to 87.8 on Wednesday.

Phoenix-based ON shares (Nasdaq: ONNN) closed up 4.19% on the day.

Arris regained its footing to valuations that resembled those closer to the beginning of the year, with the Arris 2% convertible senior notes due 2026 at 70.1 Thursday versus a closing stock price of $5.50. They closed Wednesday at 69.87 versus a closing stock price of $5.38.

The Arris shares (Nasdaq: ARRS) gained 2.2%.

Alexandria prices $220 million

Some traders disregarded the two REIT issues that priced late Wednesday as uninteresting to investors, but the $220 million of cumulative convertible preferred stock, or 8.8 million shares, that Alexandria priced at par of $25 did trade somewhat.

The preferreds were priced with a 7% dividend and an initial conversion premium of 15%. The shares priced at the cheap end of talk, which was for a dividend of 6.5% to 7% and with an initial conversion premium of 15% to 20%.

J.P. Morgan Securities Inc., Citigroup and Merrill Lynch & Co. were joint bookrunners.

The issue is hard-call protected for five years, with soft call protection thereafter at a 150% hurdle; there are no investor puts. The notes feature standard dividend and takeover protection but no contingent conversion.

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.

The REIT intends to use proceeds to pay down an unsecured line of credit and for general corporate purposes that include acquisitions and property development.

Shares of Alexandria (NYSE: ARE) gained $2.84, or 3.2%, to close at $90.59 on Thursday.

Raser prices $50 million

Merrill was the bookrunner of Raser's $50 million of five-year convertible bonds, which priced at par to yield 8% with an initial conversion premium of 20%. Originally the issue was seen at $75 million with a $25 million greenshoe. The deal had been put off twice since being announced a week ago.

The Rule 144A deal priced beyond the cheap end of talk for the coupon, which was for 5.5% to 6.5%, and at the cheap end of talk for the initial conversion premium, which was seen at 20% to 30%.

The notes are non-callable for life and are not putable. There is full dividend protection via a conversion ratio adjustment and change-of-control protection through a make-whole adjustment premium delivered upon conversion as incremental shares. Conversion settlement will be stock with fractional shares paid in cash.

Provo, Utah-based Raser is a technology licensing and development company focused on geothermal power generation. Its shares (NYSE Arca: RZ) closed down less than half a percentage point at $7.66.

NovaGold prices $95 million

Canada's NovaGold Resources Inc. priced a downsized $95 million of seven-year convertibles at par to yield 5.5% with an initial conversion premium of 35%. There is an over-allotment option for up to an additional $14 million of notes.

The deal was originally seen at $100 million with a $15 million greenshoe.

The senior unsecured notes priced beyond the cheap end of talk for the coupon, which was between 4.25% to 4.75%, and at the cheap end of talk for the initial conversion premium, seen at between 35% to 40%.

J.P. Morgan Securities was the bookrunner of the registered offering, which is non-callable with a put in year five. The notes also have dividend and takeover protection and net share settlement.

NovaGold is a precious metals exploration and development company based in Vancouver, B.C.

Its shares (NYSE: NG) closed down 5.17% Thursday.

Medical Properties prices $75 million

Medical Properties price a downsized $75 million of five-year exchangeable senior notes at par to yield 9.25% with an initial conversion premium of 15%, according to a company news release.

The Rule 144A deal was originally expected to total $125 million.

The issue came at the cheap end of talk, which was for a coupon of 8.75% to 9.25% and an initial conversion premium of 15% to 20%.

"This is not a trend, hopefully," said one syndicate source.

Concurrent with the offering, Medical Properties sold 11 million shares of common stock at $10.75, with an over-allotment option of up to 1.65 million additional shares.

UBS Investment Bank was the bookrunner of the notes; while the stock offering was being sold via bookrunner UBS, with KeyBanc Capital Markets and RBC Capital Markets acting as co-lead managers and Deutsche Bank Securities, J.P. Morgan Securities and Raymond James Bank acting as co-managers, according to a company release.

Medical Properties is a Birmingham, Ala.-based real estate investment trust focused on health care facilities. Its shares (NYSE: MPW) closed down half a percentage point at $10.80 on Thursday.

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