AGCO gains on first day; Transmeridian upsized, locked away on debut; Advanced Medical slightly better

By Kenneth Lim

Boston, Nov. 29 - AGCO Corp.'s newly issued convertibles were among the most active names in an otherwise quiet session on Wednesday, carving out a slight gain after the deal priced within talk.

Transmeridian Exploration Inc. also made its debut, but no trades were seen as the closely held deal priced after a restricted launch.

Beyond the new deals, Advanced Medical Optics Inc. gained slightly after the company said its does not expect to fully regain its market share following a recent product recall, but expects affected production to resume by May as it expands in a different product segment.

AGCO rises on debut

AGCO's new 1.25% convertible senior subordinated note due 2036 opened about ½ point above its offered price on Wednesday after the paper arrived within talk.

"It was active in the morning, but it sort of died down in the afternoon," a sellside convertible bond trader said. "It came at the mids, which was probably just enough to get the deal done. It was cheap enough, but I wouldn't say it was great."

The 1.25% convertible traded at about 100.5 against a stock price of $31.34. AGCO stock (NYSE: AG) closed at $31.40, up by 0.22% or 7 cents.

AGCO priced the $175 million offering on Tuesday, with an initial conversion premium of 30%.

The convertible was offered at par and talked at a coupon of 1.125% to 1.625% and an initial conversion premium of 27.5% to 32.5%.

There is an over-allotment option for a further $26.25 million.

Morgan Stanley and Goldman Sachs were the bookrunners of the registered off-the-shelf offering.

AGCO, a Duluth, Ga.-based agricultural equipment maker, said the proceeds of the deal will be used to pay part of its outstanding Libor plus 175 basis points bank loans due June 2009.

A sellside convertible analyst said the deal looked cheap on paper, but the outlook was a concern.

"It did model cheap, that's the thing you could say about it, but then where does it go?" the analyst said. "I wasn't all that positive on it."

The analyst noted that a number of equity analysts seemed to be neutral on the stock, which would dull the attraction of the deal for outright investors.

It also did not seem to be ideal for hedge investors.

"It doesn't set up well...it's got a negative carry with a low coupon," the analyst said. "So what's attractive for investors?

"There's nothing appealing one way or another," the analyst said.

Transmeridian prices on the quiet

Transmeridian's upsized $44 million of convertible senior preferred stock did not trade on Wednesday, with the closely held deal believed to have been sold to a small number of investors.

The preferred, which priced at a dividend of 15% and an initial conversion premium of 39%, was offered with par of $100. Price talk was not disclosed, and syndicate sources declined to comment.

Jefferies & Co. was the bookrunner of the Rule 144A offering.

Transmeridian, a Houston, Texas-based owner and developer of oil reserves in the Caspian Sea region, said it plans to use the proceeds of the deals to fund the development of its South Alibek field and for working capital and general purposes.

"Didn't see any of those trade," a sellside convertible bond trader said. "I didn't even know they priced."

A sellside convertible bond analyst said the deal "probably got put away" in a few hands. "The banks probably just approached a few investors," the analyst said.

A buysider said the new preferreds were not expected to feature much in the secondary market.

"The guys who got it are probably already very familiar with the company," the buysider said. "Nobody's going to be trading them."

Advanced Medical gains slightly

Advanced Medical Optics' 2.5% convertible due 2024 improved slightly outright on Wednesday in line with its stock after the company said it expects to lose market share because of a recent contact lens solution recall, but outlined plans to resume production by May and expand in the laser eye surgery market.

The convertible traded at 97.5 against a stock price of $35.25, about an eighth-point higher. Advanced Medical stock (NYSE: EYE) rose 1.49% or 52 cents to close at $35.39.

Advanced Medical told investors at a Piper Jaffray conference on Wednesday that it expects to lose market share in the Asia Pacific market after it recalled its Complete MoisturePlus contact lens solution and Active Packs earlier in the month due to bacterial contamination in a few lots. The China plant where those lots were made has been shut down, but Advanced Medical expects all four production lines to be up by May 2007. The company also said it is stepping up efforts to try to take a bigger slice of the laser eye surgery pie.

Santa Ana, Calif.-based Advanced Medical makes eye care products.

"The conference was slightly positive," a sellside convertible analyst said.

"If what they're saying is true, the affected products were an isolated incident and they've figured out what needs to be done to fix it. They're still going to have to do some damage control marketing wise, and there's a risk of regulatory issues, although that's probably a small risk and most of that may have been priced in already.

"But overall it looks like this might be contained."

In a note Wednesday, Lehman Brothers convertible analyst Venu Krishna recommended the 2.5% convertible, saying it was a defensive alternative to Advanced Medical's other convertible series.

"Given our expectation of short term volatility in EYE's stock price and the potential for further (though limited) downside in stock we are recommending a risk-reduction trade," Krishna wrote in the note.

For outright investors, Krishna said holders of Advanced Medical's 1.375% convertible due 2025 and 3.25% convertible due 2026 should swap into the shorter-dated 2.5% convertible, which may be put in 2010 and has a higher bond floor of 86.

"Though the stock could be volatile in the near to medium term, investors with a slightly longer investment horizon can position themselves for a potential recovery in a highly risk controlled manner via the 2.5% convertibles," Krishna wrote.

Hedge investors can also set up with the 2.5% convertible, but the potential returns do not appear stellar, the analyst wrote.

"Though the potential for significant news driven volatility in the near to medium term exists, we are somewhat lukewarm on the EYE convertibles from an arbitrage perspective given valuation concerns (high implied volatility)," Krishna wrote.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.