Ciena's upsized $300 million deal up in gray market; American Equity higher; Symmetricom falls

By Kenneth Lim

Boston, April 4 - Tuesday was another slow day for the convertible bond market, with action mainly coming from investors adjusting their positions ahead of Ciena Corp.'s plans to refinance its existing 3.75% convertibles due 2008 with a new offering of seven-year convertible senior notes.

The new convertibles by Ciena were priced Tuesday in an upsized $300 million deal that came within talk to yield 0.25% with an initial conversion premium of 15% after the market closed. Before the pricing, onlookers saw the securities as decently priced, with the gray market bidding the convertible just under a point above par.

On the whole, the convertible bond market is coming off its strongest quarter since the end of 2004, said Lehman Brother's convertibles research team in a report. Credit spreads have tightened, while investors are increasingly willing to pay for volatility, the team said.

Elsewhere, the newly issued Boston Properties Inc. convertibles continued to struggle, with offers below par on their second day of trading on the secondary market. The Boston-based office real estate investment trust's 3.75% convertible due 2036 was seen offered at 99.25 on Tuesday, after hovering around par on its debut Monday. The convertible was marked at 98.96 bid, 99.21 offered against the closing stock price of $89.94 on Tuesday. Boston Properties stock (NYSE: BXP) closed down 1.76% or $1.61.

The BioMarin Pharmaceutical Inc. 2.5% convertible senior subordinated notes due 2013 fared better, staying firmly above par in their second week of trading. The new BioMarin convertibles were bid at 101.5 versus a stock price of $12.75 on Tuesday. The company's existing 3.5% convertible due 2008, meanwhile, was marked at 104.07 bid, 105.07 offered against the closing stock price of $12.99. Shares of Novato, Calif.-based BioMarin (Nasdaq: BMRN) gained 10 cents or 0.78% on Tuesday. BioMarin is a pharmaceutical company whose metabolic disorder drug Phenoptin recently received positive trial results.

American Equity up 3 points

Other active names on Tuesday included American Equity Investment Life Holding Co., whose 5.25% convertible due 2024 has gone up about 3 points outright in line with the stock from last week after Oppenheimer initiated coverage on the stock with a buy recommendation.

"It's been active lately and we're seeing good two-way flow," said a sell-side source.

American Equity's convertible last traded at 125.875 against a closing stock price of $14.44 on Tuesday. A major convertible shop had the convertible marked at 124.9 bid, 125.15 offered against the same stock price. American Equity stock (NYSE: AEL) closed 16 cents, or 1.12% higher. American Equity is a West Des Moines, Iowa-based insurance provider.

Symmetricom falls on guidance

San Jose, Calif.-based Symmetricom Inc., however, saw its 3.25% convertible due 2025 fall in line with the stock after it cut its revenue forecast and guided for a third-quarter net loss on Monday. The convertible was marked at 94.375 versus a stock price of $8 on Monday. The lightly traded convertible, which had only three transactions reported on Trace in March, had traded at 99.237 on March 6, when the stock closed at $8.46.

"The stock was hit, so obviously the converts have come down a bit," said a sell-side analyst.

Symmetricom on Monday said it expects a net loss of 14 cents to 16 cents per share for its fiscal third quarter, below its previous guidance for a profit between 4 cents and 8 cents per share. Symmetricom also cut is revenue outlook for the quarter to between $45 million and $46 million, from between $48 million and $53 million previously. The maker of precision timing and frequency products cited poor conditions in its timing and test division and impairment charges.

Symmetricom stock (Nasdaq: SYMM) closed at $7.96 on Tuesday, down 41 cents or 4.9%.

Ciena prices upsized $300 million deal

Ciena upsized its offering of seven-year convertible senior notes on Tuesday to $300 million and priced it within talk with a coupon of 0.25% and an initial conversion premium of 15%, while initial market reaction to the talk was positive.

The convertibles, which were offered at par, were talked to yield between 0.125% and 0.625% with an initial conversion premium of 10% to 15%. There is also an over-allotment option of a further $45 million. The original size of the deal was $250 million with a greenshoe option of $37.5 million.

Goldman Sachs & Co. was the bookrunner of the deal.

Trading sources said the convertible was bid from 100.5 to about 100.75 in the gray market at different times on Tuesday. Ciena stock (Nasdaq: CIEN) closed at $4.91 on Tuesday, down 31 cents or 5.94%.

A sell-side analyst said the convertible looked 2.5% cheap at the mid-point of talk using a credit spread of 350 basis points over Libor and a 45% volatility. The convertible would have been 4% cheap at the wide end of talk with those assumptions.

The analyst said the 350 bps spread was based on where Ciena's existing 3.75% convertible due 2008 was trading before it moved up in anticipation of a call.

Ciena, a Linthicum, Md.-based communications network specialist, is using part of the net proceeds from the new deal to buy a call spread option on its common stock. The rest of the proceeds will be used as working capital and for general corporate purposes, which may include buying back the outstanding 3.75% convertibles due 2008.

"[The 3.75s] are trading in what we call no-man's land, somewhere between redemption value and actual theoretical value at this time," the analyst said, adding that the theoretical value of the old convertibles should be around the high 80s based on fundamentals.

The 3.75% convertibles gained about one point outright on Tuesday, said a sell-side market source. They were marked at 95.88 against the closing stock price of $4.91 on Tuesday.

Another New York-based convertible strategist thought the convertibles would "do fine," but said he was wary about using too strong a credit rating for the company.

"They do have a lot of cash, more than $400 million in net cash, and that is a positive, but operationally there's still some issues," he said.

He pointed out that the company has disappointed the Street in the past with inaccurate guidance - "I would be worried that they might do that again," he said.

Ciena's customers include telecom companies that are candidates for merger-and-acquisition activity such as Verizon Communications Inc. and BellSouth Corp., the strategist said. There are concerns over the health of Ciena's business with Verizon, and merged customers with stronger pricing power may "squeeze" Ciena's profits, he said.

A sellsider said that despite the positive feedback from the market regarding the deal, there may be some "flippers" looking to turn in a quick profit.

"I'm hearing that...demand seems to be strong, so allocations will tend to be small, so it supports some theories that they [investors] would wind up just flipping the deal," he said.

U.S. converts gain 5.53% in quarter

The U.S. convertible bond market gained 5.53% in the first three months of 2006 for its best quarterly performance since the end of 2004, said the convertible research team at Lehman Brothers in a month-end report.

Credit spreads in the first quarter of 2006 were also tighter compared to end-2005 levels, while the difference between implied and realized volatility of investment-grade convertibles suggests that investors are more ready to pay for volatility, wrote analysts Venu Krishna, Brendan Lynch and Manoj Shivdasani.

The U.S. convertible market's performance in the first quarter had the strongest quarterly returns for outright investors since the fourth quarter of 2004, when the market gained 6.6%, the analysts said. It was also the best first quarter since 2000. The market gained 1.41% in March this year.

The best performing sectors in the first quarter were basic industry, with a 13.8% gain, and energy, with a 10.3% gain. Those two sectors also had the best returns in 2005. The underperforming sectors include investment-grades, which were up just 2.8%, non-cyclicals, which gained 2.9%, and communications, which returned 2.5%.

The implied volatility of investment grade convertible bonds increased 2% in the first quarter, but the realized volatility of their underlying stocks slid 6%. Implied volatility now stands at 24.3% at the end of March, while the realized volatility of the underlying equity is 20.3% as of end-March.

The analysts also noted that credit spreads in the first quarter of 2006 were "meaningfully tighter" than December 2005 levels, with investment grade convertible spreads tightening by 32 basis points and non-investment grade convertibles tightening by 153 bps.

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