Informatica's surprise issue, Coherent up on debuts; Albany International's new deal struggles

By Kenneth Lim

Boston, March 8 - A trio of new deals kept the convertible bond market busy on Wednesday, starting with a surprise morning offer-and-price sale by Informatica Corp.

Albany International Corp.'s issue (NYSE: AIN) struggled to make an impact on its debut and was seen trading below par at times. Coherent Inc. did better with its deal, but it still only managed to gain just over a point over the day.

"In two of them [Informatica and Coherent] it was decent," said a buy-side trader. "AIN did not do that well, but the stock kind of saved the day."

Commenting on the recent performances of new issues, an analyst said the cheapness of the broader secondary convertible bond market may be making it tougher for fresh deals to get a strong start.

In trading, Oil States International Inc. took a hit in line with its stock, but analysts seemed puzzled about the stock's slide. JDS Uniphase Corp. rose amid positive sentiment in the telecommunications equipment sector.

Informatica launches surprise deal

Informatica announced early Wednesday that it was planning to offer $200 million of 20-year convertible bonds, and just over an hour later said it had priced the notes at the cheap end of talk to yield 3% with an initial conversion premium of 29.28%.

Talk guided for a coupon between 2.75% and 3% and an initial conversion premium between 29.28% and 32.51%.

UBS Investment Bank was the bookrunner of the Rule 144A deal.

"I'm a little surprised at the timing of this," said a Connecticut-based analyst. "Coming at the morning like this, it's not even a drive-by. I don't know if you can call it a fly-by or something."

Despite the unexpected launch, investors seemed to think the pricing was reasonable.

"These quick deals are not that common any more," the trader said. "Usually it's at least over night. In this case you had to respond within 10, 15 minutes flat, but the underwriters got it done, and they had a fair reading on the market."

"They gauged the market right," he added. "But had it been a marketed deal, you'd probably have had a higher premium."

At the initial conversion premium, each bond may be exchanged for 50 Informatica shares at $20 per share. Informatica stock (Nasdaq: INFA) closed at $15.47 on Tuesday. There is a greenshoe option of $30 million.

The buy-side trader said the convertibles closed around 101.25 versus a stock price of $14.40. A buy-side analyst, who said he valued the security using Treasuries plus 325 basis points, saw trades around 101.375 to 101.75 during the day. Another analyst said that although there was early confusion over what spreads to use, he felt Treasuries plus 300 to 350 bps and volatility of 30% seemed right.

Informatica stock closed at $14.28 on Wednesday, down $1.19 or 7.68%.

The sell-side analyst said the drop in the stock price as a result of the offering was "typical on the dilution" from the issuance, but he felt the deal "looks like it came pretty cheap."

"It may actually set up OK for hedged accounts," he said.

"The relative cheapness of it makes it somewhat attractive," he added. "There's a decent amount of cash on the balance sheet."

Redwood City, Calif.-based Informatica said it plans to use up to $50 million of the offering's net proceeds to buy back its own shares. The rest of the proceeds will be used for working capital and for general corporate purposes, which may include acquisitions and strategic investments.

The share buyback is "never good for credit, but that's limited to $50 million, so there will be a fair amount of cash left over unless there's something else on the plate," the analyst said.

Informatica is a developer of data integration software for businesses.

Albany deal struggles

Albany International's new 2.25% convertibles due 2026 failed to make significant gains on Wednesday.

A trading source said 500 units were offered at a point above par in a swap deal against a stock price of $37.10, meaning the seller was long on the bond and short on the stock. A buy-side source said he saw the convertibles fall to parity of 98 during the day.

"It doesn't seem like there's interest in the Albany Internationals," he said, adding that still wasn't clear on the company's business.

Another buy-side source, who said the convertibles were already down about half a point near the start of the session, said "the stock kind of saved the day" for Albany International, which makes consumable parts for paper-making machines.

Albany International shares rose 87 cents, or 2.35%, to close at $37.97 on Wednesday.

Albany International fixed the terms of its $150 million deal late Tuesday at the cheap end of talk, which was guiding for a coupon between 1.75% and 2.25% and an initial conversion premium between 20% and 25%.

The bookrunners were JP Morgan and Banc of America.

Albany, N.Y.-based Albany International said it will use proceeds from the offering to repurchase the remaining of the 3.5 million of its class A common stock it has not already bought. The company, which announced the share buyback in January, has already repurchased 663,700 shares.

The company will also enter into convertible note hedge and warrant transactions that will give it the option to buy shares and reduce the potential dilution from the conversion of the notes.

Coherent up slightly

Coherent Inc.'s new 2.75% convertibles due 2011 fared slightly better. A trading source said about one million units were offered a point above par before the market opened on Wednesday, and reached par plus 1.75 points in early trading. A buy-side trader said the convertible was about 1.5 points to two points up at the end of the day.

Coherent stock (Nasdaq: COHR) closed at $30.20, up 76 cents or 2.58%.

Analysts were comfortable with the company's credit quality, but were expecting pricing in the mid-to-cheap range of talk. The $175 million deal had been talked to yield between 2.5% and 3% with an initial conversion premium between 27.5% and 32.5%, market sources said.

Bookrunner Merrill Lynch also has a $25 million greenshoe option.

Coherent is using proceeds from the deal to help pay for its planned $376 million acquisition of East Setauket, N.Y.-based Excel Technology Inc.

Coherent is a Santa Clara, Calif.-based designer and manufacturer of lasers and precision optics used in areas such as semiconductor manufacturing and environmental research.

New deals compete with cheap market: analyst

Commenting on the generally unexciting debuts of new issues this week, a sell-side analyst said the cheap pricing of recent deals like Albany International and Informatica were not necessarily signs of slowing demand in the primary market.

"I don't know if it's that demand for primary market papers has gone down," the analyst said. "But everything that's coming has to compete with a fairly cheap secondary market right now. Maybe it's more just a question of underwriters overreaching a little bit too far."

In such a market, new deals that are too richly priced would not seem as attractive as convertibles already in the market, he said.

The secondary market was fairly expensive "for the longest time," the analyst said, and it was only after the last round of convertible redemptions that the market started to get more imbalanced.

"There were a lot of funds keeping a lot of cash on the sideline because they thought they would have to make more redemptions," he said. "Now the market is generally cheaper, and the underwriters still need to adjust it out a little bit."

Oil States falls with stock

Beyond the new deals, Oil States International's 2.375% convertible due 2025 has been sliding in line with the stock since the start of the week.

On Wednesday, a sell-side source said the convertible was trading around 123.5 points to 124 points versus a stock price of $32.43. Data from Trace shows the bond traded at about 127.6 at the start of the week when the stock traded above $33.

Another analyst, who noted that the convertible had a high delta of 85 on Wednesday, has come down sharply the 135 levels back in late February.

"They're getting hit pretty good, but I don't know why," the analyst said.

He said the convertibles were "still in the money, not by much though," and would continue to "ride right down with the stock."

Oil States on Monday announced that it had completed the merger of its hydraulic workover business with Boots and Coots International Well Control Inc., but the transaction had already been announced in 2005.

Oil States stock (NYSE: OIS) closed at $32.46 on Wednesday, down 39 cents or 1.19%.

JDS Uniphase up on sector's strengths

JDS Uniphase's zero-coupon convertibles due 2010 rose about two points on Wednesday as the stock surged on what one trader said was bullish sentiment on the communications equipment sector.

The trader said the convertible was trading at about 98.5 points on Wednesday, when the stock rose 25 cents, or 7.14%, to $3.75. The security was marked by a major convertible shop at 98.72 bid, 99.22 offered versus the closing stock price. The same firm marked the convertible at 96.57 bid, 97.07 offered at Tuesday's close, when the stock price was $3.50.

The trader said "people are pretty bullish on equipment spending and mergers in the industry."

He added that Verizon Communications Inc.'s announcement on Wednesday that it was stepping up efforts to introduce its fiber-optic network to homes could also mean more demand for the equipment that JDS Uniphase supplies.

JDS Uniphase (Nasdaq: JDSU) is a San Jose, Calif.-based provider of optical and test-and-measurement communications equipment.

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