Health Management firm despite soft stock; JDS Uniphase jumps on outlook; Covanta plans deal

By Kenneth Lim

Boston, Jan. 19 - Health Management Associates Inc. continued to see active trading on Friday, holding steady despite a slide in the stock in the wake of the company's planned special dividend.

Meanwhile, JDS Uniphase Corp. jumped outright after the company raised its second-quarter outlook.

From the primary market, Covanta Holding Corp. announced plans for a $325 million offering of 20-year convertible senior debentures. Syndicate sources confirmed that the offering is only expected to price Thursday, Jan. 25.

The convertible market in general experienced the typical Friday slowdown.

"There isn't much going on today," a buyside convertible trader said. "Just a handful of names, but nothing's moved significantly."

A sellside convertible trader joked that "everybody's talking to Lehman," referring to the convertible shop's decision on Thursday to stop charging commissions on stock trades for convertible clients.

The two traders said they had not heard if other convertible brokers will be adopting the same practice. The sellside trader added that the rest of the convertible shops may be slow to walk down the same line, if they were ever going to do it.

"I think there's going to be certain names where it's feasible [to stop charging commissions], there are going to be other names where it's not going to be feasible," the sellsider said. "And it's not going to be the dealers or brokers who decide it, it's going to be the securities themselves."

The trader explained that some securities such as General Motors Corp. and Ford Motor Co. are liquid and there are at least six to seven dealers providing "decent quotes" for them. "In those names you can eliminate the commission," the trader said.

But for less liquid names, the commission was a "cushion" for dealers who provide quotes when the market is not as easy to assess, the trader aid. Smaller shops that had expertise in the less liquid securities are probably not going to be affected as much by Lehman's move, the trader added.

"They're probably trading smaller names with less liquidity...this commission wasn't part of the equation for them anyway," the trader said.

Health Management holds firm

Health Management Associates' 4.375% convertible due 2023 was flat to slightly better outright on Friday, despite a retreat in the stock.

The convertible traded at 103 against a stock price of $20.30. Health Management stock (NYSE: HMA) closed at $20.02, down by 3.19% or 66 cents.

"HMA continues to get better," a sellside convertible trader said. "Ever since they announced the $10 special dividend they've gotten dramatically better. At $20.50 to $21 the bonds were at 100.75, ever since they announced the dividend it's now 103 with the stock at about $20.60. They're 2.25 points better. They got better right then, and that continues to be the case."

Health Management on Wednesday announced a special cash dividend of $10 per common share, or about $2.4 billion in total, payable on March 1. The dividend will be paid for with $3.25 billion of new debt - a $2.75 billion term loan and a $500 million six-year revolving credit facility. Health Management is a Naples, Fla.-based operator of hospitals in rural communities.

A sellside convertible analyst said Health Management was slightly higher because of the dividend, but did not think the change was significant.

"The dividend is providing some support right now," the analyst said. "But the problem is that the credit, which wasn't that great to begin with, is going to be worse after the dividend is paid out."

The analyst explained that more worrisome for investors would be whatever was left after the recapitalization.

"You're looking at more than $3 billion in extra debt, significantly higher interest expense, and nothing significantly better in terms of fundamentals," the analyst said. "If you're a stockholder, sure, you're going to get $10 per share, but your stock's going to be much deeper in debt because you took that money."

The analyst added that, because of the dividend, Health Management was looking at lower-than-expected results for the year. Health Management is forecasting 2007 earnings per share of 61 cents to 71 cents, below the previous Street estimate of about $1.34.

"It's just not that great," the analyst said.

JDS Uniphase climbs with outlook

JDS Uniphase's 1% convertible due 2026 improved about 4 points outright on Friday after the company raised its fiscal second-quarter sales forecast.

The convertible traded at about 88.81 against a stock price of $17.50. JDS Uniphase stock (Nasdaq: JDSU) rose 9.69% or $1.53 to close at $17.32.

"They just seemed to get better," a sellsider said.

JDS Uniphase said it expects sales for its fiscal second quarter to be between $360 million and $365 million, up from its earlier forecast of $332 million to $352 million. JDSU said its test and measurement business performed particularly well in the quarter, although its optical communications segment experienced a slight revenue decline.

A sellside convertible analyst said the news was a surprise.

"Most people were expecting a soft quarter because of the results that are coming in from the telcos," the analyst said.

The analyst said JDS Uniphase continues to be an attractive name.

"The company's fundamental outlook is pretty strong," the analyst said. "They're starting to show signs of profitability, and that's partly because there's growing demand for bandwidth."

Covanta plans offering

Covanta's planned $325 million of 20-year convertible senior debentures is expected to price

Thursday, Jan. 25, after the market closes, syndicate sources confirmed.

Price talk has not been set.

The debentures will be offered at par.

There is an over-allotment option for a further $48.75 million.

Lehman Brothers, JP Morgan and Merrill Lynch are the bookrunners of the registered off-the-shelf offering.

Covanta is concurrently offering $125 million of its common stock. It is also seeking a $300 million revolving credit facility, a $320 million funded letter of credit facility and $680 million first lien term loan facility as part of a recapitalization plan.

Covanta, a Fairfield, N.J.-based waste disposal, energy and specialty services company, plans to use the proceeds of the deals and cash on hand to buy back its outstanding notes. Covanta is concurrently tendering for $195.8 million of 8.5% senior secured notes due 2010 of MSW Energy, $224.1million of 7.375% senior secured notes due 2010 of MSW Energy, and $211.6 million of 6.26% senior notes due 2015 of subsidiary ARC Holdings.

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