Amkor, JDS Uniphase, Manor Care gain in gray; Scottish Re improves on stock rebound; Merix prices deal

By Kenneth Lim

Boston, May 11 - A wave of new deals kept convertible bond investors busy on Thursday while inflation and interest rate concerns took some shine off stocks. But all three offerings expected to price in the evening were bid higher in the gray market.

Amkor Technology Inc.'s planned $150 million offering of five-year convertible notes was seen bid 0.875 point above par with the deal getting mixed reactions from analysts and traders.

JDS Uniphase Corp.'s proposed $375 million offering of 20-year convertible senior notes was seen bid at half a point above par as investors said they liked the structure but were cautious about how the proceeds would be used.

Manor Care Inc.'s expected $250 million of 30-year convertible senior notes was seen in the gray market bid at 0.125 point above par and offered at 0.625 point above par with analysts describing it as just barely attractive.

Meanwhile, Merix Corp. priced $60 million of seven-year convertible bonds cheaper than talked on the back of the stock's recent climb, but the deal's announcement on Thursday sent the stock tumbling almost 14%.

In the secondary market, Scottish Re Group Ltd.'s 4.5% convertible due 2022 was seen improving on a dollar-neutral basis as the stock recovered from the previous week's slide. The convertible was seen trading at about 104.25 against the closing stock price of $20.20 on Thursday, higher by about 1.25 points outright. Scottish Re stock (NYSE: SCT) gained 1.35% or 27 cents.

"The last three days, those have kind of traded off the stock, they've been improving the last two days," a sellsider said.

Hamilton, Bermuda-incorporated Scottish Re on May 4 reported first-quarter net income of $11.6 million, about a third of the $33.4 million profit it earned in the year-ago period.

Overall the convertible bond market was mixed, market sources said.

"Yield-to-put plays all came in obviously with the rates going higher yesterday," a Connecticut-based convertible trader said. "But it looked like a forgone conclusion that that would happen."

A sell-side convertible trader said, "The stock market's getting hit hard off of inflation concerns, but it's good for volatility, so I'm seeing some trading as a result of that."

A convertible analyst said some of the uncertainty and volatility may also have been behind the slew of new offerings that have hit the market this week.

"I suspect because the market had been nearing a five-year high, and also I think people are a little concerned about rates going up," the analyst said.

The strong primary market activity may also have to do with the earnings reporting season trickling down.

"I think earnings are winding down," a sell-side convertible strategist said. "There was talk that before the earnings, the bankers wanted to wait until everybody had their 10-K [or 10-Q] filed, and then they entered earnings season, but now that's over."

Amkor deal gets mixed reaction

Amkor's proposed $150 million of five-year convertible senior subordinated notes were seen as generally cheap, but some analysts noted that the attraction of the paper for convertible arbitrage players would depend on the borrow that they could get.

The convertibles were talked at a coupon of 2.375% to 2.875% and an initial conversion premium of 27.5% to 32.5% and were expected to price Thursday after the market closed. Amkor stock (Nasdaq: AMKR) closed at $11.22 on Thursday, lower by 6.27% or 75 cents.

The deal is being offered concurrently with a sale of 10-year senior notes. Earlier in the session, the notes were upsized to $400 million from $300 million and priced at par to yield 9¼%.

Citigroup Global Markets is the bookrunner for both registered off-the-shelf deal.

Amkor, a Chandler, Ariz.-based semiconductor test and assembly service provider, will use the proceeds from the convertible offering to redeem, repurchase or retire part of its outstanding 10.5% senior subordinated notes due 2009.

A sell-side convertible analyst said the offering modeled about 2% cheap at the mid-point based on a credit spread of 400 basis points over Libor, saying it "looked OK."

A convertible bond trader said the Amkor deal was not a big surprise. "Amkor needed to do something, you knew they were going to come back [to the capital market]. They've been a serial financier in converts," the trader said.

But the trader said that "Amkor is interesting if you can get the borrow."

A convertible strategist said he spoken to people who like the deal, but agreed that it depends on the kind of borrow that an investor can get for the hedge.

"The problem is if there's a very bad borrow," the strategist said. "If you use a borrow that's fine, at high 40s or 50s volatility, it's 2 to 3 points cheap. But if the borrow is as bad as I'm being told, it's 3 to 4 points rich. So it really depends on what kind of borrow clients get."

JDSU offer may precede acquisition

JDS Uniphase's proposed $375 million of 20-year convertible senior notes were bid about a half-point above par in the gray market as observers described the deal as slightly cheap, but some raised concerns about the risk that the company may spend its cash on an acquisition.

The new convertibles were talked at a coupon of 0.5% to 1% and an initial conversion premium of 20% to 25%, and pricing was expected Thursday after the market closed. There is an over-allotment option of $50 million.

JDS Uniphase stock (Nasdaq: JDSU) closed at $3.03 on Thursday, lower by 10.62% or 36 cents.

JP Morgan and Merrill Lynch are the bookrunners of the Rule 144A offering.

JDS Uniphase is a San Jose, Calif.-based optical networking equipment supplier. It has earmarked the proceeds of the offering for general corporate purposes, which may include repaying existing debt.

An analyst said the convertible was 1.5 points cheap at the mid-point of talk using a credit spread of 350 bps over Libor and a volatility of 45%. The analyst said the spread was based on an extra 50 bps wider than the existing JDSU zero-coupon convertible due 2010.

Another sellsider actually thought that a 350 bps spread was too aggressive. "The company has a lot of cash, but they're probably going to use the proceeds for an acquisition," the sellsider said.

The problem with that is that JDS Uniphase still "haven't really generated any free cash," which could affect its credit in an acquisition, the sellsider said.

A convertible bond trader said the low coupon on the new JDS Uniphase paper took away some of the attraction of the offering. The trader said the company already has "a ton of cash," and may be trying to sell convertibles at this time because "they're probably negative on their stock," which is now about a third better than six months ago.

"These guys, the stock has languished for some time," the trader said. "I think they've been...looking for a business for some time, and they're going to use the cash from this to go forward and make some acquisitions."

"And when they make an acquisition, they spend some money, and that weakens the credit," the trader said.

Manor Care seen as slightly cheap

Manor Care's planned $250 million of 30-year convertible senior notes were also bid up about an eighth of a point in the gray market on Thursday, and were seen as just barely cheap.

The convertibles were talked to yield 2% to 2.5% with an initial conversion premium of 10% to 15%, and pricing was also expected Thursday after the market closed. Manor Care stock (NYSE: HCR) closed at $45.23 on Thursday, up by 0.11% or 5 cents.

There is no over-allotment option.

JP Morgan is the bookrunner of the Rule 144A deal.

The convertibles are expected to be rated Baa3 by Moody's Investors Service and Bbb by Standard and Poor's.

Manor Care is a Toledo, Ohio-based provider of short-term post-acute and long-term health care. The company will use the proceeds from the offering to buy back $244 million of its common stock, including about $125 million expected to be sold by purchasers of the convertible notes.

A sellsider said the offering was "just slightly cheap" at the midpoint using a volatility of around 20%.

A convertible analyst said all the three new deals have been just slightly cheap.

"In terms of the cheapness, compared to what we were seeing maybe month and half ago, we haven't had a deal that's substantially cheap for a while," the analyst said. "The recent trend seems to be towards more aggressive pricing, which is clearly not desirable from an investor's perspective."

"New issue cheapness has been shrinking in the past month or two," the analyst said.

Merix launches $60 million deal

Merix Corp. on Thursday priced $60 million of seven-year convertible senior subordinated notes cheaper than talked at a coupon of 4% with an initial conversion premium of 12.5%, market sources said.

Price talk guided for a coupon of 3.5% to 4% and an initial conversion premium of 15% to 20%.

A syndicate source said the lower premium was because "the stock had run up considerably in the past few days and the company was willing to give some concessions back."

Merix stock (Nasdaq: MERX) closed at $11.63 on Thursday after the deal was announced, lower by 13.85% or $1.87.

Thomas Weisel Partners was the bookrunner of the deal.

But the Rule 144A offering did not make a high-profile debut, with some traders saying they had not heard about the deal as late as Thursday afternoon.

Merix is a Forest Grove, Ore.-based maker of printed circuit boards. It will use the proceeds of the deal to retire its outstanding $25 million of 6.5% convertible debentures due May 2007 and $30 million of bank debt. Any remaining proceeds will be used to further reduce debt and for corporate purposes.

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