Archstone-Smith slips on sector concerns; Dollar Financial, NovaMed, Stewart quiet in gray

By Kenneth Lim

Boston, June 21 - Archstone-Smith Trust slipped outright on Thursday following mounting concerns about real estate investment trust stock prices.

A quiet secondary scene spread into the primary market with a lack of gray activity for the three deals that were supposed to price after the market closed.

Dollar Financial Corp. appeared to have one of the cheaper deals being offered, but analysts said interest in the offering could be limited by discomfort over its business risks.

NovaMed Inc.'s offering was also seen as modeling cheap, but the small size of its deal also muted chatter in the gray market.

Stewart Enterprises Inc. failed to attract any bids in the gray market with its deal seen as modeling slightly cheap to fair with an unexciting fundamental story.

Archstone-Smith slips on REIT woes

Archstone-Smith's 4% convertible due 2036 eased about 1/8 point outright on Thursday in line with its stock, which declined amid a broader retreat by the real estate investment trust sector.

The Archstone-Smith convertible traded at 105 against a stock price of $59.10. Archstone-Smith stock (NYSE: ASN) dropped 0.44% or 26 cents to close at $59.06.

"I think all the REITs were worse today because some analysts have been downgrading the sector because of possible rising interest rates and valuations that are already quite high," a sellside convertible analyst said. "Although honestly I think it's not surprising. Convert guys at least, at least those who have been around, have already figured that REITs were close to a peak when they started issuing convertibles last year."

Archstone-Smith, an Englewood, Colo.-based real estate investment trust that focuses on apartments, is currently being acquired by a private equity consortium of Tishman Speyer and Lehman Brothers. The deal consideration is about $22.2 billion, including debt. The deal still needs to secure shareholder approval.

"There are a couple of things that aren't so good here," the analyst said. "First, because of all the concerns right now about rising interest rates and an overvalued residential property sector, you're probably not going to get a better offer than the one on the table, so outrights aren't going to get as much upside as they'd hoped. Second, the hedge guys aren't happy either, because the possibility of higher financing costs could hit their bonds' values even more."

The analyst said the same concerns are rippling throughout the REIT sector.

"Definitely the possibility of rising financing costs suggests that REITs aren't as attractive now," the analyst said. "Some of the people in here have also been hoping for buyouts and mergers in the sector, which looks a little less likely now, at least if you're talking about a buyout."

Dollar Financial seen as cheap

Dollar Financial's planned $150 million offering of 20-year convertible senior notes was quiet in the gray market on Thursday despite views that the deal appeared cheap.

The convertible was expected to price after the market closed. The deal was talked at a coupon of 2.5% to 3% with an initial conversion premium of 30% to 35%.

The convertibles were offered at par. Dollar Financial stock (Nasdaq: DLLR) fell 5.85% or $1.82 to close at $29.28 following the announcement of the deal.

There is an over-allotment option for an additional $22.5 million.

Bear Stearns and Wachovia are the bookrunners of the Rule 144A offering.

Dollar Financial, a Berwyn, Pa.-based provider of financial services to "under-banked" customers, said it will use the proceeds of the deal to repay an outstanding revolving loan, fund general purposes and possible repay other outstanding debts.

"I actually think these look very good at the mids at least," said a convertible analyst who used a credit spread in the high 300 basis points over Libor range. "I got them about 2% cheap at the mids."

Another convertible analyst who had a wider credit spread of around 500 basis points over Treasuries and a volatility close to 40% also modeled the deal around 2% cheap.

"The credit is probably better than market participants are likely to give it credit for just because it's not the type of business that convertible investors like and the comparables out there have fairly wide spreads on them so I'm not in any rush to give a tighter credit spread," the second analyst said.

Despite the apparent cheapness of the deal, the second analyst said interest could be slightly poorer than normal.

"It's another one of these low-end financial companies catering to the working poor, check-cashing stores and stuff like that," the analyst said. "It's not exactly the same but the same sort of business as CompuCredit and World Acceptance. CompuCredit has a couple of the newer issues that trade actively, World Acceptance has been put away never to be seen again."

"This is not a space that convertible investors feel real good about," the analyst said. "They have low quality borrowers in their eyes, combine that with the fact that it's a financial company that runs on a lot of leverage...The story's OK. Good market position, growing internationally, it's just that the business will be a little tough for the average convertible player to swallow."

But the analyst said that the volatility of the stock will make a difference in assessing the deal.

"The stock's been historically up around the 40%, 44% area, but the 30-day historical volatility is less than that," the analyst said. "So if you go lower than 40% it's going to take away the cheapness."

NovaMed interest limited by size

NovaMed's planned $52.5 million of five-year convertible senior subordinated notes also stayed silent in the gray market on Thursday as the small size of the deal limited interest in the offering.

The deal was talked at a coupon of 0.5% to 1% and an initial conversion premium of 15% to 20%, and the convertibles were offered at par. NoveMed stock (Nasdaq: NOVA) closed at $5.54, lower by 6.26% or 37 cents.

There is an over-allotment option for a further $7.5 million.

Deutsche Bank is the bookrunner of the registered offering.

NovaMed, a Chicago-based healthcare services company that operates surgical facilities, said the proceeds of the deal will be used to fund convertible note hedge and warrant transactions, repay an outstanding $125 million of debt.

"I had them about 1.5% cheap at the mids," a sellside convertible analyst said. The analyst used a credit spread in the mid-200 bps over Libor range and a volatility in the high 30% region.

Another convertible strategist said market interest was thin.

"I didn't really look at NOVA," the strategist said. "It's a small deal, small market cap."

Stewart seen around fair

Stewart's planned $250 million two-tranche offering of convertible senior notes was seen to model just slightly cheap to fairly valued.

The $125 million seven-year series was talked at a coupon of 2.875% to 3.375% and an initial conversion premium of 30% to 35% while the equally sized nine-year tranche was talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 30% to 35%.

The convertibles will be offered at par. Stewart stock (Nasdaq: STEI) was up by 0.36% or 3 cents at its closing price of $8.34.

There is no over-allotment option.

Banc of America and Merrill Lynch are the bookrunners of the Rule 144A offering.

Stewart, a Jefferson, La.-based provider of funeral and cemetery products, said it will use the proceeds to fund convertible note hedge and warrant transactions. It will use $165 million of the proceeds to prepay the remaining balance of a term loan and use $64.2 million to buy back its own stock.

"It's a good stable company," one convertible analyst said. "People keep dying. But it's free cash flow positive, and they should continue to stay free cash flow positive. It's a very boring company."

The general consensus was that the longer-dated notes appeared richer than the shorter ones.

The analyst said the first tranche modeled slightly cheap using a credit spread around 200 basis points over Treasuries while the nine-year series appeared fair using a slightly wider credit spread.

Another analyst had the two tranches modeling at similar levels, but used a slightly higher volatility.

A third analyst explained that Stewart's stock volatility could be a little tricky to pin down.

"When you look at the vol, that's the interesting story," the third analyst said. "Historically it could be 30% maybe higher, but that's because they had problems at the company. But recently the company's had a complete management turnover and the underlying business is still stable. If you believe the tight credit, then it's in the high 20s instead of low 30s...I think it will settle somewhere in the middle. If you look at historic vol, you could say this is low 30s, but if you look at why it's been so volatile, the reasons are not expected to be recurring."

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