RAIT Financial gains on debut; Illumina, USEC lag again; Allergan's notes trade at parity

By Rebecca Melvin

New York, March 16 - RAIT Financial Trust's newly priced 7% convertible due 2031 traded up to 101.5 on its debut in secondary market trading Wednesday despite a drop in the Philadelphia-based real estate investment trust's underlying shares.

In contrast, Illumina Inc.'s new 0.25% convertibles, which debuted Tuesday, were lower for a second straight day as market players continued to view the paper coolly.

No new issues were launched Wednesday, and the markets overall were still besieged by Japan's nuclear crisis and troubling political hotspots in the Middle East.

"Uncertainty is killing the market," a New York-based sellside analyst said, referring to the situation in Japan.

Also on Wednesday, there was worse-than-expected economic data. The Commerce Department reported that new home construction fell to the second-lowest level on record in February, reflecting weak demand.

Wholesale prices rose last month by the most in nearly two years due to higher energy costs and the biggest increase in food prices in 36 years.

USEC Inc., a supplier of enriched uranium fuel for commercial nuclear plants, was lower for a third straight day in active trade. However, the paper had steadied considerably since its 7- or 8-point tumble on Monday.

Many trades Wednesday represented a continuation of action that began early in the week or last week.

Allergan Inc. was lower once again but was continuing to trade at parity or a little above. The Irvine, Calif.-based maker of Botox called its approximately $650 million of 1.5% convertibles due 2026 last week.

Thermo Fisher Scientific Inc. also remained an active trader following a call of its 3.75% convertibles.

WebMD Health Corp. saw its older 2.5% convertibles due 2018, which priced in January, trade at 103 versus a share price of $55.10, and the newer WebMB 2.25% convertibles due 2016, which priced last week, traded at 98, flat compared to Tuesday and lower by 0.25 point compared to Monday.

The equity markets ended down about 2% on average, although off their session lows.

RAIT rises on debut

RAIT Financial's 7% convertibles traded between 100 and 101.5 during the session with the underlying shares of the REIT dropping 7 cents, or 3%, to $2.26 on Wednesday.

RAIT priced $100 million of the 20-year convertible senior notes with a 10% premium, which was beyond the cheap end of price talk of 5.75% to 6.25% for the coupon and 17.5% to 22.5% for the premium.

Bank of America Merrill Lynch was the bookrunner for the offering, which has a $15 million greenshoe.

The notes are non-callable for five years, with puts in years five, 10 and 15. There is contingent conversion if shares rise to 130% of the conversion price.

There is full dividend protection via a conversion rate adjustment and change-of-control protection.

As previously reported, RAIT intends to use the proceeds to repay debt and for general trust purposes, including working capital. Specifically, $75 million of the proceeds are earmarked for the repurchase of some of its 6.875% convertibles.

RAIT is focused on properties in Philadelphia and in the Baltimore to Washington, D.C., corridor.

Illumina lags

Illumina's 0.25% convertibles due 2016 traded at 97.75 versus a share price of $64.00 Wednesday, compared to 98.25 versus a share price of $64.25 near the close of markets on Tuesday.

The notes were reoffered by the underwriters at a discount of 98.25 to par.

Shares of the San Diego-based developer of genetic research tools ended the session lower by 53 cents, or 0.8%, at $63.66 on Wednesday.

The paper's poor performance was blamed on its small coupon and the fact that the company and its underwriters brought a pretty large deal during multiple geopolitical crises.

"They wanted to go ahead with aggressive pricing, and it wasn't well received because of the events in Japan, Middle East, and Europe; and they thought they could get away with it," a New York-based sellside analyst said.

"There was not enough demand for paper with so low yield," the analyst said.

"It's a big issue," the analyst said of the $800 million offering. "It has decent gamma, but negative cash and carry because the yield is so low."

The Illumina deal reminded one New York-based sellside trader of Yahoo Inc.'s 0% convertibles, which priced in 2003. That paper was also low-coupon, high-premium paper of large size, and it came on an overnight basis.

The Yahoo deal was an overnight $750 million issue, with 0% coupon and high premium; and it was panned by market players on its debut.

Ultimately the paper did OK, the sellsider said, "because the stock bailed out the underwriter."

Illumina's $800 million deal has a $120 million greenshoe, and the Rule 144A paper was sold via Morgan Stanley & Co. Inc. and Goldman Sachs & Co. with Bank of America Merrill Lynch as a co-manager.

The notes are non-callable and may not be put.

The company is buying back $425 million of common stock and another chunk of convertible paper with the proceeds.

Allergan down again

Allergan's 1.5% convertibles traded down about another point to 109, compared to a 1% drop in the underlying shares to $68.90, which was off 67 cents.

The bonds, which will be called in three weeks, have been trading at parity or a little above, because of the underlying value of the stock in the convertible.

Parity is $63.33, so if the stock remains above this level, holders will convert. If the stock goes down below that level the put is worthless, a New York-based sellside analyst said.

"There's no premium in the name. Whatever the stock does determines the price," the analyst said.

Market players might be buying the paper because they believe it's a cheap put, and others might be selling it because it's trading like a stock and if it goes below $63.33 it's worthless, the analyst said.

Mentioned in this article:

Allergan Inc. NYSE: AGN

Illumina Inc. ILMN

RAIT Financial Trust Nasdaq: RAS

Thermo Fisher Scientific Inc. NYSE: TMO

USEC Inc. NYSE: USU

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