Conexant gains on report; ON Semiconductor up despite downgrade; Ciena struggles off the blocks

By Kenneth Lim

Boston, April 5 - Conexant Systems Inc.'s 4% convertible due 2026 gained about 2.5 points outright on Wednesday in line with the stock after Merrill Lynch & Co. gave buy recommendations on both the equity and the convertible.

Meanwhile, the convertibles of ON Semiconductor Corp. shrugged off a stock downgrade to underperform by Credit Suisse, with the company's zero-coupon due 2024 gaining slightly in line with the shares.

"I don't understand why this would be a laggard," said a sell-side convertible analyst of the downgrade.

The newly priced convertibles from Ciena Corp. did not fare as well, struggling to maintain par on their secondary market debut despite a positive response in the gray market before terms were set.

The secondary market overall had another quiet day in what is turning out to be a slow week, market sources said. But for the primary market the week is turning out to be an active start to the second quarter.

Allergan Inc. said Wednesday it plans to offer $700 million of 20-year convertible senior notes talked to yield 1% to 1.5% with an initial conversion premium between 20% and 25%. The Allergan deal is expected to price Thursday after the market closes, along with Annaly Mortgage Management Inc.'s planned $100 million offer of convertible perpetual preferred stock.

Annaly's offering is talked at a dividend between 5.75% and 6.25% with an initial conversion premium between 17.5% and 22.5%.

Also from the biotech sector, Amgen Inc.'s 0.125% convertibles due 2011 and 0.375% convertibles due 2013 were active, seen trading flat around par in the morning with the stock at $72, said a buy-side trader.

"There was a big seller in the morning, but they actually improved as the day went on," the buysider said.

A major convertible shop marked the biotech giant's 0.125% convertible at 100.7 bid, 100.85 offered versus the closing stock price of $72.86 at the end of Wednesday, while the 0.375% security was marked at 101 bid, 101.15 offered against the same stock price. Shares of Thousand Oaks, Calif.-based Amgen (Nasdaq: AMGN) closed up 84 cents or 1.17%.

Conexant up 3 points outright on report

Conexant's new 4% convertible due 2026 was up about 2.5 points outright on Wednesday as the stock rose 4.7% after Merrill Lynch analysts recommended buying the convertible and the stock.

The convertible, which was reoffered at parity of 98.5 at the beginning of March, was seen at 104.75 bid, 105.5 offered against a stock price of $3.65 on Wednesday. It was marked at 107.14 bid, 107.64 offered versus the closing stock price of $3.79 at another trading desk. Conexant stock (Nasdaq: CNXT) ended 17 cents higher.

Merrill Lynch analysts Marc Malloy and Yaw Debrah wrote in a report on Wednesday that the convertible was trading at a 1.8% discount using a credit spread of 850 basis points over Treasuries and a 55% volatility based on Monday's price of 103.5 versus $3.58.

"We are recommending Conexant's 4% convertible bond due 2026, reflecting fundamental outlook of the underlying equity...We view the convert as a better risk-adjusted play when compared to the stock while offering yield advantage," the analysts wrote.

The convertible could return 18% if the stock gains 25%, and lose only 9.2% if the stock falls 25%, the analysts estimated. The convertible also has a current yield that is 393 bps better than the common stock, which does not pay any dividend.

Conexant needs to come up with a further $515 million to refinance its older 4% convertibles due 2007, but with the older notes trading at about 98.13, investors seem confident that the company will be able to meet its debt obligations, the analysts said.

The convertible recommendation was made together with Merrill Lynch's initiation of coverage on the stock with a buy rating. Equity analyst Mark Heller wrote in a report that Conexant is set to ride strong product cycles in the satellite set-top boxes and xDSL areas. He set a price target of $4.50 on the shares.

ON gains despite stock downgrade

ON Semiconductor's zero-coupon convertible due 2024 traded about one point higher outright in line with the stock on Wednesday despite a stock downgrade by Credit Suisse.

The convertible was marked at 90.54 bid, 91.54 offered against the closing stock price of $7.31. Phoenix-based ON Semiconductor's (Nasdaq: ONNN) stock closed 12 cents or 1.67% higher.

Credit Suisse analyst Michael Masdea on Wednesday downgraded ON Semiconductor stock to underperform from neutral, saying it was a relative view against the universe of "some of the best public semiconductor companies" covered by the firm.

"While an improving profile and a tighter supply-chain limit the downside, muted cyclicality (less leverage) and a share overhang (VC) limit upside," Masdea wrote. "In the context of our relative rating system we rate ONNN an underperform."

Even though ON Semiconductor has improved its balance sheet, product mix and profitability, its "limited exposure to product cycles and lower barriers will likely limit ONNN to below industry revenue growth rates longer-term," the analyst wrote.

But a sell-side convertible analyst said he disagreed with labeling ON Semiconductor an underperformer, noting that the market seemed to shrug off the downgrade.

The analyst said consensus estimates for the company are predicting 50 cents earnings per share this year, making the company attractive for a tech company.

"To me, it looks like it's priced in line with the other more commodity, low-end chip manufacturers," the analyst said. "It looks like it's [the stock] fairly valued, it's definitely not expensive...it doesn't really jump out at me as being overvalued."

In the meantime, the company looks healthy, the analyst said. ON Semiconductor had a couple of million dollars in cash at the end of 2005, is generating cash, has steady earnings, a debt-to-EBITDA of about four times and low interest coverage, he said. "It's not a great credit, but they look all right," he added.

The convertible analyst said ON Semiconductor may also have gotten a boost by "relief buying" after the company announced late Tuesday that it would report its first-quarter results on April 27.

"Making it through the pre-announcement season without a pre-announcement is usually good for a small move," the analyst said. "Now that we're through the pre-announcement season, every time a company puts out a press release setting out their results announcement, the stock pops up on relief buying."

Ciena struggles on debut

Ciena's newly priced 0.25% convertible senior notes due 2013 barely made par on a neutral basis on Wednesday despite being bid up in the gray market, as investors said the final pricing took most of the shine off the security.

The convertibles were described as "very heavy" by a sell-side trading source who said they were trading at 99.375 during the day. Another trader said the securities closed at 99.5 bid, 100 offered. Ciena stock (Nasdaq: CIEN) slid 6 cents, or 1.22%, to close at $4.85 on Wednesday.

The convertible were priced late Tuesday within talk of 0.125% to 0.625%, up 10% to 15%. The size of the deal was also increased to $300 million with a greenshoe of $45 million, from $250 million with a greenshoe of $37.5 million. Goldman Sachs and Co. was the bookrunner.

Analysts had modeled the convertibles as cheap at the midpoint of talk, and had been bid between 100.5 and 100.75 on Tuesday in the gray market.

"I thought it was fair at best," said a buy-side source of the pricing. "I thought they kind of pushed it a little bit. There was nothing left on the table for the investors."

"We flipped it," the buysider added. "I didn't think it was too compelling."

Ciena is a Linthicum, Md.-based communications network specialist.

Allergan plans $700 million deal

Allergan Inc. said Wednesday it plans to offer a $700 million offering of 20-year convertible senior notes. Syndicate sources confirmed that price talk is for a coupon of 1% to 1.5% with an initial conversion premium between 20% and 25%.

Pricing is expected on Thursday after the market closes.

The convertibles are being offered at par in a Rule 144A deal concurrently with a separate $800 million offering of 10-year senior notes. There is an over-allotment option of $50 million on the convertible deal.

Morgan Stanley, Bank of America and Citigroup are the bookrunners.

Irvine, Calif.-based Allergan is a specialty pharmaceutical manufacturer with products that treat ophthalmic, neurological, aesthetic and dermatological conditions. Allergan said it will use proceeds from the convertible and straight-bond offerings to redeem its outstanding zero-coupon convertible notes due 2022 and to repurchase $257 million of its common stock. It will also use the proceeds to pay for its acquisition of Inamed Corp. in March this year, including the repayment of an outstanding $825 million from a bridge loan for the acquisition.

Allergan's zero-coupon convertibles were marked at 122.13 bid, 122.26 offered versus the closing stock price of $107.15 on Wednesday. Allergan stock (NYSE: AGN) closed $1.44 or 1.33% lower in the day, and slid a further 85 cents, or 0.79%, in after-market trading.

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