CACI climbs in debut; L-1 rises despite borrow concerns; Amgen slips further; Conseco gains on sentiment

By Kenneth Lim

Boston, May 11 - Convertible investors took warmly to new deals on Friday as CACI International Inc. and L-1 Identity Solutions Inc. gained on their first day of trading.

Amgen Inc. continued to slip outright but held on a dollar-neutral basis as the stock continued to weaken on concerns of weaker sales from its main anemia drug.

Conseco Inc. improved slightly with its stock as investors believed the beaten-down stock may be bottoming out.

The convertible market in general appeared to end on firm ground, a sellside convertible strategist said.

"I think for the week it was firm," the strategist said. "Toward the end of last week things started getting better and it's continued into this week. Before that we saw all the new issuance and it kind of led to some rebalancing in the market. The market kind of worked through that back to a steady flow on both sides. It was good this week with a fair amount of new issues and continuing strength, although nothing really stood out."

CACI gains on debut

CACI's new 2.125% convertible senior subordinated note due 2014 rose by about a point outright on Friday with the deal seen as a straightforward offering that came at a good price.

The convertible was bid at 101 against a stock price of $45.54 early Friday. The notes were offered at par. CACI stock (NYSE: CAI) closed at $45.38, lower by 0.35% or 16 cents.

"I thought the CACIs did OK," a buysider said. "They were active in the morning but it got kind of quiet in the afternoon."

CACI priced its $270 million deal on Thursday after the market closed at an initial conversion premium of 20%. The deal was talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $30 million.

JPMorgan and Banc of America were the bookrunners of the Rule 144A offering.

CACI, an Arlington, Va.-based simulation and information technology company, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions that will raise the effective initial conversion price and premium. The proceeds will also fund general corporate purposes, including possible acquisitions and stock buybacks.

"We thought the pricing was good," the buysider said. "It wasn't priced too aggressively, let's put it this way. It's a solid company with a decent credit, the coupon and premium were very reasonable."

L-1 gains despite borrow

L-1's new 3.75% convertible senior note due 2027 also gained almost a point on Friday, but volume was thinner amid concerns about a lack of borrow.

The convertible was marked at 100.875 against a stock price of $20 on Friday. The note was offered at par. L-1 stock (NYSE: ID) slipped modestly by 0.05% or a penny to finish at $19.99.

"From what I hear it's mostly outrights looking at this," a sellside convertible trader said. "I saw some trade, but not a whole lot."

L-1 priced the $150 million deal to yield 3.75% with an initial conversion premium of 60%. The deal was talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 57.5% and 62.5%.

There is an over-allotment option for a further $25 million.

Bear Stearns and Banc of America were the bookrunners of the Rule 144A offering.

L-1, a Stamford, Conn.-based identification security company, said it will use $70 million of the proceeds to buy back 3.5 million shares of its common stock, and $75.1 million to repay existing senior debt. The remainder of the proceeds will fund general purposes including acquisitions.

The trader said deal's initial conversion premium put off some investors.

"It's a really high premium," the trader said. "This is the kind of stuff where you really got to believe in the story to want to get involved. I know hedge guys who won't touch this thing. It's cheap, but you can't borrow the stock."

But a buysider said the deal looked interesting from an outright perspective.

"I think they've got a pretty interesting business so if you're outright this is actually an OK piece of paper," the buysider said. "The premium's very high, but they've got a reset that will actually raise the conversion rate if the stock trades above the conversion price, so if you think the stock's going to fly you wouldn't mind paying for this."

Amgen eases further

Amgen convertibles continued to slip outright with the stock and remained unchanged on a dollar-neutral basis on Friday as investors continued to express concern about its anemia drug's prospects.

The Amgen 0.125% convertible due 2011 slipped ¼ point to trade at 91.25 versus a stock price of $55. The 0.375% convertible due 2013 also lost about a point to change hands at 89.5 against the same stock price. Amgen stock (NAsdaq: AMGN) closed at $56.30, down by 1.8% or $1.03.

"The Amgens continue to be active," a sellside convertible trader said. "I think a number of analysts have downgraded the stock, so the stock continues to fall, but the converts are still in line."

A U.S. Food and Drug Administration advisory panel recommended tighter restrictions and further trials on the class of anemia drugs that includes Amgen's key drugs Aranesp and Epogen. Those two drugs account for a significant amount of Amgen's sales. Amgen is a Thousand Oaks, Calif.-based drug maker.

"While we did not expect the ODAC panel to be a walk in the park, the discussion was even more negative then we anticipated," wrote Credit Suisse equity analyst Michael Aberman in a note, adding: "We believe the FDA is likely to take action on the label putting even our bearish estimates at risk."

Aberman maintained his neutral rating on the stock with a $54 target stock price.

Aberman said a more restrictive label will have a material impact on Aranesp sales. Despite the stock's sharp drop after the recommendations were announced, Aberman remains cautious, citing continued weakness in the company's earnings, potential changes in Medicare reimbursement and kidney treatment policies and possible competition from other drugs.

Conseco improving

Conseco's 3.5% convertible due 2035 rose by a point outright on Friday as the stock moved higher on hopes of a recovery.

The Conseco convertible traded at 96.5 against a stock price of $18.22 on Friday. Conseco stock (NYSE: CNO) rose 2.46% or 44 cents to close at $18.35.

"Conseco was very active today," a sellsider said. "I think there's a feeling that the stock's bottomed out here. We saw good two-way flow, a little better on the buy side."

Conseco, a Carmel, Ind.-based life and health insurance company, saw its stock tumble in March after it reported a large drop in its fourth-quarter earnings and missed forecasts. The company reported lower-than-expected earnings again for its first quarter earlier in the week.

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