Convertibles mixed to mostly lower; USEC, Ceradyne drop; Nasdaq higher; Retail Properties issue to price

By Rebecca Melvin

New York, Feb. 26 - The convertibles market was mixed to mostly lower in a quiet session Tuesday. But the Nasdaq Stock Market Inc. convertibles issue, which priced last week, continued to edge higher, and word of another new issue expected to hit the market on Wednesday caused a stir among market participants after the close.

National Retail Properties Inc. is expected to price $200 million of 20-year convertibles after the close on Wednesday. Price talk on the issue appeared to be favorable compared to recent new issue pricing, with a relatively high coupon and low conversion premium. But because the company is a real-estate investment trust, higher yield was necessary, a New York-based buysider said.

Back in the secondary market, "nothing was really that active," according to a Connecticut-based sellside analyst.

But two of the biggest losers among convertibles were those of USEC Inc., which tumbled after the uranium producer said the cost of building a second enrichment plant in the United States would be higher than anticipated due to higher costs, and Ceradyne Inc., which dropped along with its underlying shares after the advanced-ceramics maker reported disappointing fourth-quarter earnings and reduced its outlook.

Also lower were the convertibles of Parker Drilling Co., after its earnings report. But the convertibles of XM Satellite Radio Holdings Inc. and Prudential Financial Inc. were seen in trade, closing flat to higher.

Retail Properties models slightly cheap

Orlando, Fla.-based National Retail plans to price convertible senior unsecured notes on Wednesday, which were talked to yield between 4.875% and 5.375% for the coupon, with an initial conversion premium of 13% to 17%.

"It happens to be a REIT with a dividend yield of over 6% on the common (quarterly dividend of $0.355), so the yield of the common tends to drive up the yield on the convertible, and also drive down the conversion premium," the buysider said.

On a positive note, "the put in five years and the five years of call protection are attractive features; effectively, it's a five-year non-callable bond," he added.

The 20-year notes are non-callable for five years, with puts in years five, 10 and 15.

Citigroup Global Markets Inc., Banc of America Securities LLC and Wachovia Securities are joint bookrunning managers, and there is a greenshoe of $30 million.

Another source surmised that perhaps some potential investors believe that since the stock has such a high dividend, the carry is not so good on a hedge. "You are short the stock and so you pay the dividend out," the sellsider said.

The issue was seen modeling one or two points cheap at the midpoint of talk, using 22% volatility to 24% volatility and a credit spread of between 314 basis points to 320 basis points, according to a New York-based sellside trader-analyst.

A sister issue of convertibles issued by National Properties in September 2007 closed higher on Tuesday. The 3.95% senior convertible notes, which originally priced at the cheap end of talk, closed Tuesday at 104.849, versus a stock price of $23.02, compared to a close of 103.322, versus a stock price of $22.41 on Monday. National Retail shares (NYSE: NNN) closed 2.7% higher on the day.

USEC drops more than 15 points outright

The 3% USEC convertibles due 2014 closed Tuesday at 81.23, versus a stock price of $6.82, compared to a close Monday at 97.88, versus a share price of $9.25.

USEC shares (NYSE: USU) fell 26.3% after the Bethesda, Md.-based company said that higher prices on labor, commodities and construction materials raised management's anticipated costs for completing the American Centrifuge Plant now under construction.

Citing a recent Cambridge Energy Research Associates study that the cost of building new nuclear plants increased by 40% in the past year, the company said its plant cost now stands at $3.5 billion, but it continues to update cost estimates.

Ceradyne drops almost 15 points outright

The 2.875% convertibles of Ceradyne closed Tuesday at 93.06 versus a share price of $35.75, compared to 107.56 versus a share price of $47.15 on Tuesday. The shares (Nasdaq: CRDN) plunged $11.40, or 24%.

The Costa Mesa, Calif.-based company missed estimates with its fourth quarter earnings report Tuesday and lowered its 2008 forecast. Sales for the quarter were up however to $191.4 million from $178.7 million in the year-earlier quarter.

The company said it had to reduce guidance due to multiple delays and extensions in a planned government order for body armor. Shipments on the anticipated order are not now expected until the fourth quarter. Due to the delays, Ceradyne plans to cut 234 employees.

Ceradyne projected that its 2008 earnings will range from $4.55 to $5.05 a share, with sales pegged at $715 million to $826 million. The previous outlook was $5.60 a share to $6.65 a share on sales of $780 million to $1.07 billion.

Nasdaq issue improves

The 2.5% Nasdaq convertibles continued to hold up as its stock improved, with the convertibles seen around 104.5 to 105.5, according to a New York-based sellsider.

Another source put the close on the 2.5s at 104.7 versus a share price of $41.10, compared to 104.21, versus a share price of $40.59 on Monday.

Shares (Nasdaq: NDAQ) were up 51 cents, or $1.26, at $41.10, on the day.

The Nasdaq priced $425 million of 5.5 year convertible bonds Feb. 20, with a coupon of 2.5% and an initial conversion premium of 41%. The senior notes priced at the low end of talk for the coupon, which was for 2.5% to 3%, and outside the range of talk for the premium, which was for 35% to 40%.

Bookrunners were JP Morgan Securities Inc. and Banc of America Securities LLC. There is a greenshoe of $50 million.

The bonds are non-callable, and there are no investor puts.

Meanwhile another fairly recent new issue, the 3% convertibles of OSI Pharmaceuticals, closed at about 95.5 on Tuesday, which was down about 2 points from Monday, matching a dip in its underlying shares.

Shares of Melville, N.Y.-based OSI Pharmaceuticals (Nasdaq: OSIP) closed down 75 cents, or 2%, to $36.20.

By one analyst's count there have been 16 new convertible issues this year, and 2008 promises to be favorable for the convertibles new issues market given where interest rates are currently.

Parker lower; but XM, Prudential flat to higher

Parker Drilling's 2.125% convertibles closed at 90.5 versus a $7.01 stock price, compared to 92.77 versus a share price of $7.71. The shares (NYSE: PKD) fell 9.1% after the Houston-based oil and gas drilling contractor reported a fall in fourth-quarter profit on weak barge business.

But convertibles that were little changed to slightly higher were XM Satellite Radio's 1.75% convertible senior notes, at about 85 to 86 on Tuesday, and Prudential's Libor minus 240 bps convertibles, which were at about 96.5. The underlying shares of both issues rose about 1% on Tuesday.

XM Satellite Radio is a Washington, D.C.-based satellite radio provider, and Prudential is a Newark, N.J.-based insurance company.

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