Level 3, Advanced Medical climb on arrival; International Rectifier scraps deal; Interpublic stays aloft

By Kenneth Lim

Boston, June 8 - The convertible bond market was fairly busy Thursday with two new deals by Level 3 Communications Inc. and Advanced Medical Optics Inc. joining the fray.

Level 3's new 3.5% convertibles due 2012 climbed on their debut after the size of the deal was doubled late Wednesday on the back of strong demand.

Advanced Medical Optics' fresh 3.25% convertible due 2026 also rose on its first day of trading, fuelled by optimism about the stock.

International Rectifier Corp.'s planned $650 million of seven-year convertibles bonds, however, never made it to the market after the company pulled the deal because of "adverse market conditions."

Some of the recently issued convertibles continued to see activity. Spansion Inc.'s 2.25% convertible due 2016 continued to stay above its offer price at 100.375 against a stock price of $14.70. The convertible was offered at par and priced Tuesday after the market closed. Shares of Sunnyvale, Calif.-based Spansion (Nasdaq: SPSN), a maker of flash memory products, closed at $14.32 on Thursday, down by 2.65% or 39 cents.

Interpublic Group of Cos. Inc.'s series A units remained well north of par on their second day of trading. The floating-rate notes-plus-capped warrants units were seen at 103,000 against a stock price of $9.05. The units, which also priced late Tuesday, have a coupon pegged at 1.35% over Libor. Interpublic stock (NYSE: IPG) slid 1.88% or 17 cents to end at $8.88 on Thursday. Interpublic is a New York-based advertising group.

Level 3's upsized deal climbs on debut

Level 3's new 3.5% convertible senior notes due 2012 saw strong demand ahead of pricing and opened higher right off the blocks as the market saw an improving credit story in the deal.

The convertible was bid at 100.75 against a stock price of $4.55 early Tuesday. They traded at 101.75 against a stock price of $4.50 later in the session. Level 3 stock (Nasdaq: LVLT) slid 0.44% or 2 cents to close at $4.53.

"It's a distressed credit but improving," a buyside convertible bond analyst said. "It's good, but you have to like the risk."

Level 3 doubled its offering size to $300 million and priced it within talk late Wednesday at a coupon of 3.5% and an initial conversion premium of 20%.

The notes were offered at par. Price talk was for a coupon of 3.25% to 3.75% and an initial conversion premium of 17.5% to 22.5%. The size of the deal was originally $150 million plus an over-allotment option of $22.5 million.

The greenshoe is now $45 million.

Level 3 concurrently sold 125 million shares at $4.55 apiece, or $568.75 million in total, in an off-the-shelf offering. The stock issue has an over-allotment option of a further 18.75 million shares.

Merrill Lynch was the bookrunner of the registered convertible and stock deals.

Level 3, a Broomfield, Colo.-based internet backbone services provider, plans to use the net proceeds to redeem or repurchase its 9.125% senior notes due 2008 and 10.5% senior discount notes due 2008. The remaining proceeds will be used to buy back, pay out or refinance other existing debts.

There were concerns in the market ahead of pricing that the deal could be hampered by a tough stock borrow, but the concurrent stock offering helped to ease the borrow, a trader said.

The buyside analyst said Level 3's "equity is partly tied to the credit story," and "they have been improving their credit."

Level 3's paying off its 2008 maturity debt with the proceeds of the new, longer-dated convertibles will ease the pressure on its balance sheet.

"It's [the new convertible] reasonably long-dated, and more of a liquidity cushion, but they still need to watch the cash burn," the analyst said.

Level 3 still needs to demonstrate its ability to be EBITDA positive in the face of excess network capacity and pricing pressure, the analyst said.

"They need to get to cashflow positive," the analyst said.

Advanced Medical makes early gains

Advanced Medical Optics's new 3.25% convertible senior subordinated notes due 2026 were better bid on their debut Wednesday, in line with a gain in the stock as investors saw a good equity story in the name.

The convertibles were quoted at 100.25 bid, 100.875 offered against a stock price of $45.85 early Wednesday. Advanced Medical stock (NYSE: EYE) rose 2.01% or 92 cents to close at $46.77.

"The stock co-operated, kind of moved it upward slightly," a sellsider said.

Advanced Medical priced the $450 million deal late Wednesday within talk, at a coupon of 3.25% and an initial conversion premium of 30%.

The convertibles were offered at par, and were talked at a coupon of 2.875% to 3.375% and an initial conversion premium of 27.5% to 32.5%.

There greenshoe option for a further $50 million was exercised Wednesday.

Goldman Sachs, UBS Investment Bank and Banc of America were the bookrunners of the Rule 144A offering.

"The convertible traded above par and the stock has been climbing, it was a really really good deal," a syndicate source said.

Advanced Medical Optics, a Santa Ana, Calif.-based maker of medical eye devices, will use the proceeds of the deal and cash from its existing borrowings to buy back $500 million of its common stock and to repurchase up to $100 million of its outstanding convertibles through private negotiations. Advance Medical Optics currently has a 1.375% convertible due 2025 and a 2.5% convertible due 2024 outstanding.

The sellsider said the deal modeled at around 100.7 at the mid-point of talk using a credit spread of 250 basis points over Libor and a volatility of 23%.

"They priced it at the mids, kind of cheaper at the coupon, so that helped it get a little more," the sellsider said, adding that trading tapered off later in the day.

Although the share buyback and partial convertible buyback are credit negative, which means that the company's credit spread is unlikely to improve much over the next year, the stock has a better prospect, the sellsider said.

A sellside convertible bond trader called the offering "a very interesting piece of paper, more from the equity standpoint."

Advance Medical's contact lens care products could gain market share after rival Bausch and Lomb Inc. had to recall a product line in May over safety concerns, although "the jury's still out on how much market got taken," the trader said.

"There's a real case that they could surprise going ahead," the trader said. "Outright guys are going to take a close look at this one."

But another convertible analyst said the gains from Baush and Lomb's problems may not be that significant, because the product recalls could be negative for the industry as a whole.

International Rectifier yanks deal

International Rectifier's existing 4.25% convertible due 2007 shrugged off the company's announcement early Thursday to cancel its proposed $650 million of seven-year convertible subordinated notes, citing "adverse market conditions."

The company did not elaborate further, but market sources said International Rectifier may have called off the offering, which was supposed to price Wednesday after the market closed, following its stock's sharp dive earlier in the week.

The 4.25% convertible was lightly traded Wednesday, changing hands at 99.625 against a stock price of $42. International Rectifier stock (NYSE: IRF) closed at $41.99, up by 4.53% or $1.82 after the deal was canceled.

JP Morgan, Lehman Brothers, Credit Suisse, Deutsche Bank and Goldman Sachs were the bookrunners of the Rule 144A offering.

"I didn't think it was that bad," a sellside convertible strategist said. "I would imagine a lot of times it's the company that's not happy with the stock hit, the stock tanks prior to the deal, and the company, they don't want to sell the stock at that kind of price."

The deal, which also had an over-allotment option for a further $100 million, was announced June 5 after the market closed, and International Rectifier stock fell 7.36% or $3.19 over the next two sessions to close at $40.17 on Wednesday before the deal was expected to price.

International Rectifier, an El Segundo, Calif.-based maker of power management semiconductor products, would have used the proceeds of the deal for general corporate purposes and to pay for convertible note hedge and warrant transactions.

A convertible analyst said the deal was likely canceled for specific issues and was not a reflection of the overall market's appetite for new issues.

"Every now and then somebody pulls a deal for whatever reason," the analyst said, adding. "A couple of years back, there was a 3-month period where there was something like 140 deals. We have 10 or 12 right now in the first week, it's pretty good but we're not even near those levels. There's a ways to go."

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