Advanced Medical, Charles River, Nabors gain on volatility; Symantec flat on debut; Nektar drops outright

By Kenneth Lim

Boston, June 13 - The convertible bond market had a mixed session on Tuesday, with investors chasing after volatility opportunities amid a weak equity market.

"It was busy for a lot of guys adjusting hedges more than anything," a sellside convertible trader said.

The recently issued convertibles from Advanced Medical Optics Inc. and Charles River Laboratories International Inc. improved on a dollar-neutral basis as investors saw the potential for better volatility than expected.

Meanwhile, Symantec Corp.'s newest convertibles hovered around the reoffer price of 99.5, failing to make a big impact on their debut.

Oil services names such as Nabors Industries Ltd. continued to see their convertibles improve on a dollar-neutral basis as volatility pickED up on the underlying stocks.

With volatility-sensitive names faring better than the less sensitive paper, the broader convertible market had a mixed session as the equity markets continued to stumble.

The Dow Jones Industrial Average fell 0.80% on Tuesday to close at 10.706.14, while the Nasdaq slid 0.90% to 2,072.47.

"Stocks sucked," the sellside trader said, adding that hedged investors are doing better than outright players in the current market.

"People are kind of ramping up on vol," a convertible analyst said. "You want names that kind of move to changes in volatility...I think that's why in general people will bid up volatility in certain names."

Also seen trading on Tuesday was drug maker Nektar Therapeutics' 3.25% convertible due 2012, which fell about six points outright as the stock slid amid a broader selldown in the sector. The convertible was 108.5 bid versus a stock price of $18.50 early Tuesday. Nektar stock (Nasdaq: NKTR) closed at $18.15, down by 3.51% or 66 cents.

Nektar is a San Carlos, Calif.-based biotech company.

Biotech convertibles have suffered recently as biotech stocks struggle in the equity markets, a convertible bond trader said. Although convertible investors can usually weather stock downturns, the downside protection in a biotech convertible can be more elusive, the trader said.

"If you look at some of the biotechs or the biopharms, some of these things have traded down and people have a much more difficult time with those smaller companies...judging a bond floor for a company that's showing a cash burn rather than a profit," the trader said. "The stock goes down enough on those biopharms and people start to question the credit."

"That [biotech equity] landscape is absolutely destroyed," the trader said.

Advanced Medical gains on stock story

Advanced Medical Optics' convertibles improved on Tuesday amid renewed confidence in the company's stock as well as views that volatility has improved.

The company's new 3.25% convertible due 2026 traded at 104.25 against a stock price of $104.25, while its older 2.5% convertible due 2024 changed hands at 111.25 versus a $47.65 stock price. Advanced Medical stock (NYSE: EYE) closed at $47.24 on Tuesday, down by 2.38% or $1.15.

"Those were better dollar-neutral," a buy-side convertible bond trader said.

A sell-side convertible analyst said Santa Ana, Calif.-based Advanced Medical, which makes medical devices for the eyes, appealed to outright investors because "there's a compelling equity story."

The new convertibles have also continued to receive strong buy interest because "people were conservative on the volatility assumption" when the securities were priced a week ago on June 7.

"There's mid- to high-20s volatility in the name, which I don't think people were fully buying into when they were issued," the analyst said.

Charles River

Charles River Laboratories' new 2.25% convertible due 2013 was also higher on a hedged basis as volatility picked up in the equity.

The convertible traded at 99.125 on Tuesday against a stock price of $37.75. Charles River stock (NYSE: CRL) fell 1.82% or 69 cents to close at $37.24.

"Those are about half a buck up on a neutral basis," a buy-side trader said.

"It's the same story [as Advanced Medical]," the sell-side analyst said. "It's quieter today, but those names I think people have been buying in the after-market. They're two of the notable stand-outs in terms of remaining active, I think."

Charles River, a Wilmington, Mass.-based provider of animal-based research models, reaffirmed late Monday its earlier guidance of 6% to 8% sales growth for 2006 and a net loss per share of 9 cents to 15 cents on a GAAP basis.

Symantec stays put on debut

Symantec's newly issued 0.75% convertible due 2011 and its 1% convertible due 2013 were seen trading around their reoffered price of 99.5 on Tuesday, as the market continued to express reservations about the deal even after it came at the cheap end of revised talk.

The five-year convertible senior notes were 99.375 bid, 99.75 offered versus a stock price of $15.63 early Tuesday. Symantec stock (Nasdaq: SYMC) closed at $15.62, down slightly by 0.06% or 1 cent.

"They didn't hold too well," a buy-side trader said.

A sell-side analyst said the new convertibles did not seem to have a compelling volatility angle.

"I would be more worried about volatility," the analyst said. "People are using 31-32% volatility, but I think that might be a bit too much...I'd also be concerned about the volatility dampening effect of this large convertible deal, and you could see a sub-30% volatility."

Symantec's $2 billion two-tranche offering could mean that there are many investors shorting stock and trading on a delta basis, which would dampen volatility, the analyst said.

"When you see multibillion-dollar deals, it can have that effect," the analyst said. "Symantec was a 35% volatility name in the past, but I don't think that's going to come back, at least that's my personal opinion."

Symantec is a Cupertino, Calif.-based developer of security software.

Nabors gains on oil volatility

Nabors' new 0.94% convertible due 2011 has been improving over the past week as shares of oil services companies fell.

The convertible was quoted at 94.25 bid, 94.5 offered versus a stock price of $30.90 on Tuesday. The same convertible was seen trading at 96 against a $32.38 stock price a week ago. Nabors stock (NYSE: NBR) slid 3.41% or $1.06 on Tuesday to end at $30.04.

"It was June 8 that the volatility guys stepped in and traded a lot of the Nabors," a sell-side trader said.

A sell-side convertible analyst said oil services convertibles have been improving on a hedged basis as recent declines in the shares have boosted volatility.

"The stocks have gotten smoked, but the converts have inched up," the analyst said.

Nabors is a Bermuda-headquartered land drilling contractor.

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