Coherent, Albany new deals seen as unexciting by analysts; Novell falls with stock; NRG Energy rebounds

By Kenneth Lim

Boston, March 7 - The primary convertible bond market continued to be at the center of attention on Tuesday, with analysts reckoning that new deals from Coherent Inc. and Albany International Corp. would have to be priced near the cheap end of talk to interest investors.

In line with expectations, Albany International's $150 million deal was finalized at the cheap end of talk.

Meanwhile, Novell Inc.'s convertible continued to fall in line with the stock after the company's guidance the previous week missed Street estimates. NRG Energy Inc. rebounded slightly on Tuesday after reporting that fourth-quarter profit more than tripled, but prices remained below the previous week's levels.

Coherent deal gets muted interest

While analysts were generally positive on Coherent's fundamentals and credit quality, they felt price talk guided a little richer than they preferred.

"I like their credit, but there's some concern about the pricing," said a buy-side convertible analyst who covers the sector.

Coherent on Monday announced a $175 million offering of five-year convertible bonds that market sources said were talked to yield between 2.5% and 3%, with an initial conversion premium between 27.5% and 32.5%.

Coherent stock (Nasdaq: COHR) closed at $29.44 on Tuesday, down $1.06 or 3.48%.

The deal was expected to be priced after the bell on Tuesday. Merrill Lynch is the bookrunner for the Rule 144A deal. There is a $25 million greenshoe option.

The buy-side analyst said the company had some good things going for it. The proceeds of the deal have been earmarked to help Coherent fund its $376 million acquisition of Excel Technology Inc. Coherent is a Santa Clara, Calif.-based designer and manufacturer of lasers and precision optics used in areas such as semiconductor manufacturing and environmental research.

"They're buying out their nearest competitor," the analyst said. "Strategically it's probably a good idea, because it looks like they're lacking some lasers and material processing capabilities."

But he added it remains to be seen whether the Coherent will be able to make the acquisition work. "The company that they're buying is not very cohesive itself, it's a holding company for a few businesses," he explained. "If they're successful integrating the two, it will be a boost to the whole company."

The buy-side analyst said he felt the talk was "pricing richly" based on a Treasuries plus 300 basis points credit spread.

"If they price it at the cheap end then it becomes interesting," he said. "Either you need to boost the coupon or lower the premium."

A sell-side analyst said he also thought the company had a firm credit story.

"They have almost no debt, no existing debt on the balance sheet, and they've been making money for the past five quarters at least," he said. "It should do OK."

But he did not think the issue could be priced at the rich end, and would likely fall between the mid and cheaper areas of price talks.

He was using a Libor plus 275 bps credit spread and a volatility of 32%.

Another buy-side analyst said he thought the bond was "interesting."

"I would call it fairly priced," he said. "But I don't think it would jump off the page."

Working on a Treasuries plus 350 bps credit spread assumption, he reckoned that the security would trade at par or better on an outright basis when it hits the secondary market.

Albany gets cautious response

Albany International's newly announced 20-year convertible notes had some analysts scratching their heads trying to understand the company's business, but a common conclusion was that the securities would have to be priced near the cheap end of talk.

"I don't know, I get the general sense of what this company does, but it looks like a very specialized thing," a sell-side analyst said.

Indeed, Albany, which makes consumable parts for paper-making machines as well as industrial doors, said on Monday that it was pricing $150 million of 20-year notes to yield 2.25% with an initial conversion premium of 20%.

Market sources said talk guided for a coupon between 1.75% and 2.25%, with an initial conversion premium between 20% and 25%.

There is a greenshoe option of $30 million. JP Morgan and Banc of America were the bookrunners of the Rule 144A deal.

The analyst said his concerns about the deal were not with the company's fundamentals.

"The financials look OK, but the common dividend pays almost 1%," he said. "When you think about it that way, even at the mid-point on those terms, it looks kind of expensive."

"It's a low-volatility name. With a 1% dividend, your income before you even pick up is reduced," he added.

He felt the convertibles were "worth around 98," based on a Libor plus 250 bps credit spread and a volatility of 27%.

"They will probably have to bring this at the cheap end, and/or possibly reoffer it below par."

A trading source said he saw 500 units offered at two above par in the gray market.

Another analyst said he was also modeling the Albany, N.Y.-based company "on the cheap end," using a credit spread of Treasuries plus 175 bps and a volatility of 26%. He added that he heard of other analysts using a credit spread of Treasuries plus 150 bps.

Asked about the gray market pricing, he said it "models fair there if it comes at the cheap end."

Albany International stock (NYSE: AIN) ended at $37.10 on Tuesday, two cents or 0.05% shy of the previous close.

Novell falls with stock

Novell Inc.'s 0.5% convertible bond due 2024 fell about 1.5 points on Tuesday as investors continued to punish the stock after the company reported disappointing first-quarter results and guidance at the end of the previous week.

Although a buy-side source said he saw the convertible trade at about 90.5 versus a stock price of $7.50 early in the day, the stock slid the rest of the day to close at $7.42. That stock price was 27 cents, or 3.51% lower than the previous close.

A major convertible shop marked the security at 88.03 offered, 88.53 bid against the closing stock price, compared to 89.44 bid, 89.94 offered versus the previous close.

"The stock continues to sell off, and it's because they announced poor Q1 results the other day," the source said.

Novell (Nasdaq: NOVL) said late Thursday that first-quarter profit had fallen to $1.8 million, or less than one cent per share, from $392.4 million, or 90 cents per share, in the year-ago period. Although the 2005 figure included an unusual $447.6 million gain from a Microsoft Corp. settlement, sales dropped 4% to $274.4 million from $290.1 million, which was its worst in three years.

For its second fiscal quarter, Novell guided for adjusted earnings between 2 and 3 cents per share, excluding 2 cents per share from stock option costs, on sales between $272 million and $282 million.

Novell is a Waltham, Mass.-based IT company that develops and maintains open-source software for businesses.

NRG Energy gains slightly

NRG Energy's 5.75% convertible due 2009 gained about one point on Tuesday after the stock rose slightly on the power producer's fourth-quarter profit growth.

NRG, which is based in Princeton, N.J., said fourth-quarter profit more than tripled to $64 million, or 68 cents per share, from $19 million, or 18 cents per share, in the year-ago period. The Street had been expecting earnings per share around 32 cents. The company attributed the growth to higher generation and prices in the Northeast region and to lower costs.

For 2006, NRG reiterated its expectation for $1.6 billion in adjusted EBITDA and increased guidance for cash flow from operation to $1.4 billion from $1.25 billion.

At the close, the company's 5.75% convertible was marked by a convertible shop at 232.5 bid, 233 offered against the stock price of $42.90. It was marked at 231.17 bid, 231.67 offered against a stock price of $42.53 a day earlier.

NRG stock (NYSE: NRG) closed 37 cents, or 0.87%, lower on Tuesday.

Despite the slight rebound on Tuesday, NRG is still trading below last week's levels, and an analyst noted that the 5.75% convertible has got "high current yield."

"It's starting to look pretty interesting," he said.

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