Safenet convertibles gain against stock crash; Allergan falls on debut; Rentech sets talk on new deal

By Kenneth Lim

Boston, April 7 - Safenet Inc. convertible bonds improved about 2 points on a dollar-neutral basis Friday and gave hedged investors a windfall after the company scrapped an acquisition and lowered earnings forecasts.

"This is a classic example of what you want to see in converts," said a sell-side trader. "Decent credit, stock crashes, bond sticks, premium between parity and stock price widens."

Otherwise it was a languid day for the convertible bond market, with unexpectedly strong jobs data in March casting a cloud over the debt market, said another trader. The U.S. economy added 211,000 jobs in March, adding to fears of more interest-rate hikes by the Federal Reserve and sending the yield on the 10-year Treasury to 4.96%.

"There were no buyers out there today," the trader said.

Allergan Inc.'s newly issued 1.5% convertible senior note due 2026 was not a pretty sight on its debut, never making it above par from the start. Annaly Mortgage Management Inc.'s fresh 6% perpetual convertible preferreds, which were priced within talk late Thursday, did slightly better trading, under a point above par on its first day.

Meanwhile, Rentech Inc. has set talk for its planned $50 million offering of seven-year convertible senior notes at a coupon between 3.5% and 4%, and an initial conversion premium of 18% to 22%, market sources said.

Safenet credit improves as stock crashes

Safenet's 2.5% convertible due 2010 was two points better on a dollar-neutral basis on Friday, even though it traded about six points lower outright as the stock plummeted on news of a collapsed acquisition and lowered earnings forecasts.

The convertible was marked at 87.375 bid, 88.125 offered against a stock price of $22.25 on Friday, said a sell-side source. Another trading desk had the convertible marked at 85.407 bid, 85.907 offered versus $20.92. Safenet stock (Nasdaq: SFNT) fell 19.29%, or $5.01, to close at $20.96. The stock was down a further 6 cents, or 0.29%, in after-market trading.

Safenet said Thursday after the market closed that it was scrapping the planned acquisition of nCipher plc because the deal required further antitrust review in Britain. Safenet and nCipher are two of the largest suppliers of hardware security modules in the United Kingdom and the additional review will involve "considerable expense" and last for several months, Safenet said in a statement.

Belcamp, Md.-based Safenet also cut its first-quarter revenue forecast to between $63 million and $65 million, from between $65 million and $69 million. Earnings per share for the quarter are now expected to fall below the previous guidance of 29 cents to 37 cents for non-GAAP EPS and 2 cents to 9 cents for GAAP EPS.

To top it off, Safenet said its chief financial officer, Ken Mueller, resigned.

"Obviously it's a whole mess on the management level," said a buy-side convertible analyst. "For outrights, buying into this it doesn't make any sense... I think the stock may recover, but it doesn't look likely in the near term."

But the analyst noted that Safenet's credit is still healthy at around a B rating, especially since the money raised for the acquisition - through the offering of the 2.5% convertible in December 2005 - has not been used.

"It's a decent credit," the analyst said. "The company has plenty of cash because they issued the converts and haven't used it. It was still profitable last quarter, has over $300 million in cash from the converts issued, they're a free cash flow positive company. They're not going to go bust."

One of the best options for the company at this point would be to buy back its own shares with the unused proceeds, the analyst said.

The buysider said the convertibles could become interesting for yield investors.

"Yesterday [Thursday] the yield to put was 4.5%, so today it's probably roughly 5%, not a very good yield yet, but it could get better," the buysider said.

The buysider said hedged players would have come out of the news better than outright investors.

"I can see how the convert arb would have made money on this," the buysider said.

A sell-side trader said the crash in the stock and the resilience of the convertible was "exactly what swap investors are looking for."

The stock came in more than the bonds, widening the premium between the parity and the actual bond price, the trader said.

"It was primarily held in the hands of swap investors who were long the bond, short the stock," the trader said. "They make money that way."

Allergan deal fails to break par

Allergan's new 1.5% convertible due 2026 never traded above par on Friday, market sources said. The security opened at 99.5 against a stock price of $105.55, and was seen around 98.5 later in the day. Allergan stock (NYSE: AGN) closed at $104.09, down by 1.38% or $1.46.

"From the get-go it traded right under par," said a sell-side analyst. "It wasn't really a credit story - the credit's pretty well represented in the high-grade market, so people were hoping to play the vol, but I don't think people wanted to pay the 23% historical volatility on it."

Allergan priced the $700 million convertible deal late Thursday at the cheap end of talk, which guided for a coupon of 1% to 1.5% with an initial conversion premium of 20% to 25%

Another convertible analyst said "it was a good company, it was a good deal, except the price talk was a little bit off."

The analyst said the deal was not priced right, and outright investors "are hurting right now" with the poor performance of the convertible and the slide in the stock.

"Doesn't look like the issue went well at all," the analyst said.

Allergan is an Irvine, Calif.-based specialty pharmaceuticals manufacturer whose products include Botox.

Annaly up slightly on debut

Annaly's new 6% perpetual convertible preferreds were seen trading at about 25.10 and 25.375 on Friday after the real estate investment trust priced the securities within talk late Thursday.

The preferreds, which had an initial conversion premium of 20%, were talked at a dividend between 5.75% and 6.25% and an initial conversion premium between 17.5% and 22.5%. Merrill Lynch and Co. was the bookrunner of the deal.

There was a concurrent $401 million shelf offering of common stock at $11.75 per share.

Annaly stock (NYSE: NLY) closed at $12 on Friday, higher by 1.01% or 12 cents.

The convertible deal was seen by analysts as a better play for hedge funds than for outright investors. The analysts said concerns about the stock in the current interest rate environment kept the outrights at a distance.

Annaly is a New York-based REIT that invests mainly in mortgage-backed securities. It plans to use proceeds from the stock and convertible offerings to buy mortgage-backed securities, and then it plans to borrow against those newly acquired securities to buy more mortgage-backed securities.

Rentech new deal gets cold response

Rentech has set the price talk on its $50 million offering of seven-year convertible senior notes for a coupon between 3.5% and 4% with an initial conversion premium of 18% to 22%, but analysts were cautious for various reasons.

"They're going to have a hard time moving it, especially with such a small market cap company," said a sell-side trading source.

The convertibles are expected to price Tuesday after the market closes. They are being offered at par, and there is a greenshoe option of a further $7.5 million.

Rentech is also offering 12.5 million shares of common stock with a greenshoe option of a further 1.875 million shares in a concurrent shelf issue.

Credit Suisse is running the books.

A buy-side analyst said a credit spread of 700 bps over Treasuries and a volatility of 40% to 45% may be appropriate. A sell-side analyst who used similar spreads said the offering seemed about 1% cheap at the midpoint of talk.

The trading source said the offering comes from a company with a small market capitalization - just under $440 million at the end of Friday - and just "OK credit," had a low coupon and high transaction costs.

"So all those things together are probably going to go negative against the deal," said the trading source, who did not find the deal "enticing."

"There's a certain type of player who likes these kinds of deals," the source said. "There will be a few guys who will sock it away and it won't trade a whole lot after that."

A buy-side convertible analyst said he was "not sold on their long-term or even short-term prospects."

He said Rentech, which develops alternative fuel technology, had very risky technology that seems capital intensive and competitive only at elevated oil prices.

"I just don't know if it's [oil prices] high enough," the analyst said. "The high oil prices over the past two years haven't translated into sales growth."

He was also concerned that Rentech, which is raising money from the shelf offerings to buy East Dubuque, Ill.-based fertilizer plant operator Royster-Clark Nitrogen Inc., may be diversifying due to a lack of confidence about its core technology.

"Why are you buying a fertilizer plant?" the analyst asked. "Doesn't make sense to me if you're developing your company's technology and you think it can change the world etcetera."

"You're essentially buying a cheap call option on the company," the analyst said. "But even then I'm not sure if it's that cheap."

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