Allergan new 0% convertible takes center stage and trades higher on quiet Friday

By Sara Rosenberg

New York, Nov. 1 - The convertibles market was buzzing with conversation over Allergan Inc.'s Thursday night sale of $450 million in proceeds of 0% convertible senior notes in what was otherwise described as a quiet Friday. The deal, which was viewed by some as cheaply priced, traded up as soon as it opened on Friday morning and continued to move higher during the session.

"It's Friday. It's pretty quiet," an analyst said. "The tone is kind of mixed. Some of the economic data was kind of weaker but the market seems kind of buoyant. It's hard to tell."

Allergan's new convertibles were the main focus of the day, according to Jeremy Howard, head of U.S. convertible research at Deutsche Bank. "It's a shot in the arm to the market, leaving everyone with a more optimistic tone," he said.

"It was a very good deal for investors and it left everybody with a happy feeling for the weekend," Howard explained. "We were very surprised that it was priced so cheaply."

Lately, with the complete lack of new issuance in the convertible market, issuers have priced the few new deals very aggressively, knowing that demand outweighed supply.

"They could have gotten his deal done with a much bigger premium," Howard said, adding that everyone has been talking about the recent aggressive pricing of new deals and "here somebody just gives it away".

"We knew it would be substantially oversubscribed and trade up immediately. This has been the best deal for a long time," Howard said, adding that some of the benefits include the company's investment-grade status, the decent structure on the deal, no hint of panic surrounding the company in terms of fraud and the fact that the issue is not panic financing since the company's balance sheet is in good condition.

"The company decided to take advantage of the bullish conditions in the convertible market," Howard added.

Allergan brought its deal with little notice, pricing it after market hours on Thursday. The $450 million in proceeds of 0% convertible senior notes due 2022 came at $77.941 for a yield to maturity of 1.25% and with a 25.45% initial conversion premium.

Salomon Smith Barney and Banc of America Securities led the deal. JPMorgan and Bank One are co-managers on the deal.

The deal was priced 2.43% cheap to theoretical value based on a $54.45 stock price, according to Wachovia's Brody, who used a volatility assumption of 36%, a credit spread assumption of 225 basis points and stock dividend of 36 cents.

However, not all agreed with the assessment that the convertibles were cheap. One trader told Prospect News that he found the deal to be aggressively priced based on his personal feeling of the definition of a fairly priced deal.

"The stock is very volatile. On a volatility basis it probably is very cheap," he said. "It's a 20-year piece of paper with a 1.25% yield to maturity. To me, [looking] at these numbers, it's not something we get involved in. It's a zero-coupon bond with negligible yield to maturity. One of these days when rates start moving up people are going to get killed [on these bonds]."

Allergan Inc.'s new 0% convertible senior notes were "trading pretty actively" on Friday morning, according to market sources.

They had been bid at 2.5 over issue in the gray market, according to Wachovia Securities, Inc. analyst Kimberlee Brody.

When trading began Friday, the issue opened at 2½ points above the issue price at 80½ bid, 81 offered, one analyst told Prospect News. "I think they were pretty strong off the open," he added.

At approximately 2.30 p.m. ET, the convertible was higher still, quoted at 81 5/8 bid, 81 7/8 offer, which is the equivalent of about 105%, Howard said. "There is a 5% appreciation of the bond with the stock still down about 2.6% [at 2.30 p.m. ET]. This shows how high in demand the bonds were."

The issue then held those levels for the remainder of the session, going home at 81 5/8 bid, 81 7/8 offer.

Allergan's convertibles achieved those gains even as its stock traded lower, finishing the day down $1.21 or 2.22% from Thursday's close at $53.24. It had traded as low as $51.40 shortly after the open.

Meanwhile, the downgrade of Lucent Technologies Inc.'s trust preferred stock to Caa3 from Caa1 and preferred stock to Ca from Caa2 by Moody's Investors Service is unlikely to have much effect on the company's convertibles, according to Howard.

"The only interest on Lucent is how many more dividends they're going to pay," Howard explained. "Nobody is ascribing any kind of redemption value to these securities at the moment so the downgrade is irrelevant."

On Friday, Moody's lowered the ratings on Lucent's securities due to "the severity of the decline in Lucent's revenue base, the magnitude of its current and prospective cash burn rate, lack of clarity regarding the nature and timing of a rebound in revenue and the reduced liquidity sources following the cancellation of the $1.5 billion bank facility and $500 million accounts receivable securitization vehicle."

Lucent's position as a leading vendor to the telecom sector with broad product offerings, substantial cash position of $4.4 billion and materially reduced cost structure, is recognized in the ratings as well, Moody's added.

In August 2004, the 8% convertibles preferred stock with $1.68 billion outstanding at Sept. 30 can be put to the Murray Hill, N.J. telecommunications company, Moody's noted. While the put can be settled in cash or common stock, shareholder approval may be needed for the issuance of new common stock.

Lucent's 8% convertibles preferreds dropped 12 points on the session, ending at 387 bid. The stock declined 9 cents or 7.32% to $1.14.

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