Safenet gains on earnings, stock buyback; Scottish Re widens after poor quarter; Finisar flat after rally

By Kenneth Lim

Boston, May 5 - Friday marked the end to a subdued week for the convertible bond market, with activity in the session centered on a handful of names.

Safenet Inc. improved for outright and hedged investors after the company reported results that were not as poor as some expected and announced stock buyback plans that boosted its share price.

Scottish Re Group Ltd. fell outright but ended slightly better on a hedged basis after its stock sank on the company's drop in first-quarter earnings.

Activity outside of those two names was languid, a buy-side convertible bond trader said.

"The markets in those names were active, otherwise it wasn't very busy," the buysider said.

A sell-side trader described the market in general as having slowed down this month.

"It's very quiet all around the Street...someone puts out a new deal, it gets bought, it may trade two or three days and then it totally disappears," the trader said.

Finisar Corp. convertibles were flattish after the stock eased down from a Thursday rally that was fueled by positive outlooks for the industry. The optical network equipment supplier's 5.25% convertible due 2008 was marked at 106.5 bid, 107 offered versus a stock price of $5.30, a sell-side convertible bond trader said. Finisar stock (Nasdaq: FNSR) closed at $5.25, down 1.32% or 7 cents.

A buy-side convertible analyst said the stock's Friday slide was probably "just a normal correction" after the market saw positive outlooks given by industry peers JDS Uniphase Corp. and Bookham Inc.

"It's just a normal pullback. You can't go up 5% every day," the analyst said, then quipped: "Unless you're Google."

In the biotech sector, Allergan Inc.'s convertibles were also flat early Friday as the stock held firm after a two-day slide in the aftermath of the Botox maker's first-quarter loss. The Allergan zero-coupon convertible due 2022, which has been called, was seen at 113 versus a stock price of $100.50 early Friday, while the new 1.5% convertible due 2026 traded at 96.75 at the same stock level.

Shares of Irvine, Calif.-based Allergan (NYSE: AGN) closed at $100.66, higher by a hair's width of 0.01% or 1 cent.

Teva Pharmaceutical Industries Ltd.'s 0.5% convertible due 2024 was seen trading in the morning within Thursday's range at 118.625 against a stock price of $43.25. The company's 1.75% convertible due 2026 was also flattish from Thursday, changing hands at 101.75 versus a $43.25 stock price on Friday. Shares of Israel-based Teva (Nasdaq: TEVA) closed higher by 0.55% or 24 cents at $43.51.

The generic drug maker reported early Friday that sales of its multiple sclerosis drug Copaxone rose 29% in the first quarter to reach $329 million. Teva is expected to announce its first-quarter results on Wednesday.

Biotech heavyweight Amgen Inc.'s zero-coupon convertible due 2032 also saw a couple of big trades early Friday, changing hands slightly higher than Thursday's levels at about 73.5 versus a stock price of $67.50, a sellsider said. Amgen stock (Nasdaq: AMGN) finished at $67.11, higher by 0.24% or 16 cents.

Safenet up dollar-neutral on earnings

Safenet's 2.5% convertible due 2010 was better on an outright and on a dollar-neutral basis after the company reported it results and a $50 million stock buyback program, said a buy-side convertible bond trader.

The convertible finished at around 89.5 bid, 90 offered against a stock price of $21.81 on Friday. Safenet stock (Nasdaq: SFNT) climbed 9.15% or $1.83 to close at $21.82.

"Safenet expanded a little bit, the company...initiated a stock buyback, which helped the stock," said the buy-side trader who called Safenet one of Friday's "movers."

Safenet said Thursday after the market closed that it incurred a $2.4 million net loss in the first quarter from a profit of $1.2 million in the same period a year ago. Excluding charges and acquisition costs, the Belcamp, Md.-based information security specialist had operating earnings of $3.9 million, or 16 cents per share.

The company's board also authorized a $50 million share buyback program, which gave the equity a boost.

Deutsche Bank equity analyst Todd Raker said in a research note that he was "encouraged" by the stock repurchase. "At current levels, we believe this would be about $0.06 accretive," Raker wrote.

Raker maintained his hold recommendation on the stock, but reduced his price target to $22 from $25.

A sell-side convertible analyst based in Connecticut said Safenet had "acquired a reputation for disappointing the Street," but "the company's basically fine, the credit is fine."

The stock may have rallied as much as it did on Friday partly "just on investors not hearing anything new and terrible," the sellsider said.

"The thing, too, is there are some people who stepped in and bought it on valuation," the sellsider added.

Safenet's commercial enterprise portion of their encryption business was a disappointment in the first quarter, but assuming that the company's problems in that department are not going to be "protracted," the company will be fine, the sellsider said. Safenet also has more cash than debt, and credit is not yet an issue.

But any ongoing interest in Safenet could be muted by the lack of visibility for the company, the sellsider said. Its main business aside, the company also has some "potentially lingering financial control issues" that need to be sorted out.

"It's just sort of difficult to say when it's going to turn around and get the stock moving again," the convertible analyst explained.

Scottish Re expands as stock falls

Scottish Re Group's convertible bonds "expanded a little bit" on Friday after the stock sank on the company's poor earnings, market sources said.

The company also announced that it had completed the $2.1 billion securitization of life insurance reserves, and named Glenn Schafer as its new chairman to replace Michael French, who retired on Wednesday.

Scottish Re's 4.5% convertible due 2022 was seen at about 104.75 bid, 105.25 offered against a $21.01 stock price at Friday's close, about five points lower on an outright basis, said a buy-side convertible bond trader. But the convertible was just slightly better on a hedged basis.

"They reported bad earnings, the stock was down about 10%, and the bonds expanded a little bit," the trader said.

Hamilton, Bermuda-incorporated Scottish Re reported late Thursday its first-quarter net income of $11.6 million, or 20 cents per share, from a $33.4 million profit, or 74 cents per share, in the year-ago period. The reinsurer also said it had sold $1.7 billion of 30-year notes and about $400 million of subordinated notes and equity in a Regulation Triple-X securitization of life insurance reserves. The underlying business of the securitization was acquired from ING Re in 2004, and their securitization completes Scottish Re's efforts to refinance all the Regulation Triple-X business it acquired from ING.

"You would have expected the premium to open up on those [convertibles]," said a sell-side convertible analyst.

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