RARE, School Specialty climb on debut; Duke opens flat; Chattem stays out of sight; Euroseas plans offer

By Kenneth Lim

Boston, Nov. 17 - New deals continued to dominate the convertible bond market on Friday, with RARE Hospitality International Inc. jumping a couple of points on the back of its strong equity.

School Specialty Inc.'s upsized deal gained despite a slide in the stock, as its relatively high coupon won over hedge investors.

Duke Realty Corp. hovered around its reoffered price, failing to make much of an impact as critics described the deal as a run-of-the-mill offering.

Chattem Inc. continued to stay quiet despite good interest in its deal, which was upsized and priced closer to the rich end of talk.

Meanwhile, Euroseas Ltd. announced plans for a series of two-year mandatory convertible preferreds.

In general, trading in the new convertibles was not as active as usual, a sellside convertible bond trader said.

"The new deals are very closely held by the underwriters," the trader said. "The traders have a minimal hand in them. But that's just the nature of these deals. They do not get on the Street that much at the start."

RARE opens higher

RARE's new 2.5% convertible senior notes due 2026 rose more than 2 points outright on Friday, on the back of a strong common stock and pricing that was viewed as reasonably cheap.

"They traded up. The stock's up as well, but it did well," a sellside convertible bond trader said.

The convertible traded at 102.25 against a stock price of $34.25. RARE stock (Nasdaq: RARE) closed at $34.22, up by 2.18% or 73 cents.

RARE priced its $110 million deal Thursday after the market closed, at a coupon of 2.5% and an initial conversion premium of 30%. The convertibles were offered at par and were talked at a coupon of 2.5% to 3% and an initial conversion premium of 30% to 32%.

There is an over-allotment option for a further $15 million.

Wachovia Securities was the bookrunner of the Rule 144A offering.

RARE, an Atlanta-based restaurant operator, said it will use the proceeds to buy back its common stock, of which $61 million will be repurchased concurrently.

"It traded up well," a sellside convertible bond strategist said. "I think RARE was the best of the bunch [among deals that priced Thursday], and it traded up as much."

Another convertible bond analyst also thought the RARE offering looked interesting.

"It looked all right," the analyst said. "It's a pretty good credit, and modeled slightly cheap."

But the analyst said the offering may not have been as appealing for hedge investors.

"There's not much volatility. There are no options," the analyst said. "It was a little limited in terms of how you could play it."

School Specialty starts stronger

School Specialty's new 3.75% convertible subordinated debentures due 2026 also rose on Friday, despite a decline in the common stock.

The convertible changed hands at 100.125 versus the opening stock price of $37.79. School Specialty stock (Nasdaq: SCHS) slipped 1.56%, or 59 cents, to finish at $37.20.

School Specialty priced its upsized $175 million offering Thursday near the rich end of talk, with an initial conversion premium of 36%. The debentures were offered at par and talked at a coupon of 3.5% to 4% and an initial conversion premium of 30% to 37%.

The size of the deal was originally $125 million. The over-allotment option for a further $25 million remains.

Banc of America Securities LLC was the bookrunner for the Rule 144A offering.

School Specialty, a Greenville, Wis.-based supplier of education products and equipment, said it will use the proceeds of the deal to concurrently buy back up to $40 million of its common stock and to pay back part of its existing bank debt.

A convertible bond analyst said there was healthy interest for the offering, particularly from arbitrage players.

"The premium's close to 4%, which is nice for hedgies," the analyst said.

There was also speculation about School Specialty being a potential takeover target, although the analyst thought it was unlikely.

"Some people think there's a potential that they could be acquired," the analyst said. "I'm actually not big on the idea that they could be acquired - I think it's kind of unlikely - but as long as some people think that way I suppose it's enough."

A sellsider noted that School Specialty was the target of an offer by Bain Capital Partners a year ago, although the deal fell through after financing for the deal could not be secured.

"I think somebody had approached them along those lines," the sellsider said. "It didn't go through, but it probably doesn't hurt too much now...and they have takeover protection."

Duke Realty flat on arrival

Duke's new 3.75% exchangeable senior note due 2011 was mostly flat on its debut, trading around its reoffered price of 98.5.

The exchangeable was quoted at 98.375 bid, 98.625 offered against the previous closing stock price of $40.79 early Friday. Duke stock (NYSE: DRE) closed at $41.10, higher by 0.76% or 31 cents.

"DRE was typical REIT pricing," a sellside convertible bond analyst said. It has "vol-spread pairs that we're seeing in all the other deals.

Duke priced its $575 million offering near the cheap end of talk, with an initial exchange premium of 20%. The offering size includes $75 million of an over-allotment option immediately exercised.

The reoffered range during price talk was 98.5 to 99, with the coupon and premium already set.

Morgan Stanley was the bookrunner of the Rule 144A offering.

Duke, an Indianapolis-based real estate investment trust focused on the United States' Midwest and Southeast markets, said the proceeds of the deal will be used to fund a capped call transaction, to buy back common stock and to repay an outstanding unsecured credit line.

Chattem quiet, but bigger

Chattem's new 2% convertible senior note due 2013 saw some bids early Friday, but no paper changed hands, with the upsized deal closely held by those fortunate enough to get it.

"They never quoted in the Street," a sellside convertible bond trader said. "There were a couple of levels, but they were all low bids, never two-side. It's like quoting a rumor."

The upsized $125 million Chattem deal priced within talk, with an initial conversion premium of 26%. The notes were offered at par, and talk guided for a coupon of 2% to 2.25% and an initial conversion premium of 25% to 27%.

The size of the deal was originally $100 million. There is no greenshoe.

Merrill Lynch was the bookrunner of the Rule 144A offering.

Chattem is a Chattanooga, Tenn.-based maker of over-the-counter health care products, supplements and toiletries. It said the proceeds of the deal will be used for hedge transactions and to repay $38 million on an outstanding revolving debt. It also plans to use the proceeds to help fund its planned acquisition of five Johnson & Johnson brands and Pfizer's consumer health care business.

"It did pretty well, and upsized," a sellside convertible bond analyst said. "But the thing that perplexed me about that one was why the deal was done the way it was done, in terms of why it wasn't just a straightforward 144A like everybody else."

"Apparently you had to talk to the company if you wanted to take part in it," the analyst added.

The analyst speculated that part of the reason for the tight control over the deal may have involved Chattem's planned acquisitions.

"The only reason I can think that might be the reason would be that there's a big acquisition coming, and so they're constrained by what they can do," the analyst said.

Euroseas plans deal

Euroseas Ltd. said Friday it plans to sell an unspecified amount of two-year mandatory convertible preferred stock.

Cantor Fitzgerald & Co. and Oppenheimer & Co. are the bookrunners for the registered deal.

The timing of the deal and price talk was not available Friday, and few in the market were aware of the offering.

Euroseas, a Maroussi, Greece-based owner and operator of drybulk and container vessels, said it will use the proceeds of the deal to pay back $7 million of debt incurred through its acquisition of the vessel YM Xingang IR and to acquire additional vessels.

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