Avnet improves on Lehman recommendation; Sanmina-SCI unmoved by warning; New River plans deal

By Kenneth Lim

Boston, July 18 - The convertible bond market picked up on Tuesday, seeing stronger bids across the board, with Avnet Inc. gaining against a weaker stock after the paper received a positive recommendation from Lehman Brothers.

Sanmina-SCI Corp. was unchanged outright on light trading as the maturing convertible ignored the stock's plunge after the company warned of lower-than-expected earnings in its third quarter.

Meanwhile, Par Pharmaceutical Cos. Inc.'s recent climb slowed down on Tuesday with the convertible ending flattish in line with its stock.

From the primary market, New River Pharmaceuticals Inc. announced a $125 million offering of seven-year convertibles expected to price Wednesday after the market closes.

The overall market saw better buying interest across the board, although activity continued to be light.

"We traded a wide range, we had a lot of different orders," a Connecticut-based convertible bond trader said, adding that Tuesday was considerably busier than the previous session. "All yesterday [Monday] nobody cared."

A sellside convertible trader said names were better bid on Tuesday.

"It seems like some new money's come into the market in my opinion," the trader said. "It's just been across the board people bidding for things, but volume is light too, it's just about all buys."

A sellside convertible bond strategist said the increased interest in convertible bonds was not a surprise.

"Most things are better bid, with volatility [picking up] and the safe haven aspect of convertibles," the sellsider said.

Also trading on Tuesday was deCODE Genetics Inc.'s 3.5% convertible due 2011, which slid almost three quarters of a point lower outright in line with a modest decline in the stock as the company prepared to close a $30 million stock placement. The convertible was quoted at 73.375 bid, 74.375 offered versus a stock price of $5.05, almost three-quarters of a point lower outright from its previous trade on July 14 in line with a modest decline in the stock.

deCODE shares (Nasdaq: DCGN) closed at $5.05, down by 1.18% or 6 cents.

The Reykjavik, Iceland-based biopharmaceutical company said on July 14 that it was selling $30 million of its common stock to new and existing institutional investors at $5 apiece, and the placement was expected to close Tuesday.

Avnet improves on report

Avnet's 2% convertible due 2034 improved slightly on a dollar-neutral basis and was flattish outright on Tuesday after a Lehman Brothers report recommended the note as a "conservative total return opportunity" attractive to outrights.

The convertible traded at about 92 against a stock price of $17.25 on Tuesday. Avnet stock (NYSE: AVT) closed at $17.10, down by 1.21% or 21 cents.

The Avnet convertible has been improving over the past month as the stock slid, said a convertible bond trader whose desk has been trading the name.

"With the stock going down - back in June it [the stock] was $20 - until now these bonds have probably gotten a good 2 points to 2.5 points better [on a dollar-neutral basis]," the trader said.

Shares of Phoenix, Ariz.-based Avnet, a supplier of electronics components and systems, have lost about 30% of their value since Jan. 23, 2006, and are currently trading at the low end of their historical price-earnings range of eight to 15 times, wrote Lehman convertible analyst Venu Krishna in a note.

Meanwhile, the convertible has slid only 4.8% in the same period, a 16% participation rate.

In terms of credit, Avnet's profile "appears reasonably solid and is likely to improve," Krishna wrote. Lehman expects the company's free cash flow to improve to around $254 million in fiscal 2007.

With today's low return environment, the convertible offers a high defensive risk/reward opportunity for outright investors, Krishna said. The Avnet 2% could return from 5% to 8.1% if the stock has flat to 25% returns over one year, and could still return 3.7% if Avnet stock falls 25%.

"In other words, we expect the AVT 2s to provide high single digit return on the upside and significantly outperform on the downside by continuing to provide positive returns," Krishna wrote.

The case is less compelling for hedged investors. A one-for-one hedged position that is long on the convertible and short on Avnet's 6% straight debt due 2015 returns just 7.8% if Avnet stock gains 25%, but loses 4.7% to 8.7% if the stock is flat or down 25%, Krishna said.

Sanmina-SCI unmoved by warning

Sanmina-SCI's 3% convertible due March 2007 was unchanged on Tuesday, ignoring a sharp drop in the stock after the company warned of lower-than-expected earnings for its third quarter.

The convertible traded at about 97.625 against a stock price of $3.68 on Tuesday. Sanmina-SCI stock (Nasdaq: SANM) tumbled 11.48% or 49 cents to close at $3.78.

"These Sanminas traded all right, but it's not a hedge name," a sellside convertible bond trader said.

Sanmina said late Monday that it expects third-quarter earnings of 6 to 7 cents per share, down from earlier guidance for 8 to 10 cents per share. Sanmina blamed the weak earnings on a less profitable mix in its sales, poorer than expected profitability in its computing business and slow improvement in its enclosure business.

Jefferies and Co. equity analyst Brian White said in a note that "market share shifts, a slowing economic environment and disappointing operating leverage" will continue to weigh on Sanmina in 2006. White has a hold rating on the stock.

Sanmina is a San Jose, Calif.-based electronics manufacturer.

Par's climb trails off

Par Pharmaceutical's 2.875% convertible due 2010 were flat to slightly lower outright on Tuesday, cooling off from gains made in the past few days.

The convertible traded at 87.5 against a stock price of $13.90 on Tuesday. Par Pharmaceutical stock (NYSE: PRX) gained 2.77% or 38 cents to close at $14.12.

"We continue to do a lot of the PRXs," a sellsider said. "Those kind of stabilized, pretty much in line after improving significantly the last couple of days."

Par Pharmaceutical stock plunged early July after the Spring Valley, N.J.-based drug maker said it would restate results from 2004 onwards. Class action suits were filed Monday against Par Pharmaceutical alleging violations of federal securities laws.

New River plans $125 million deal

New River Pharmaceuticals plans to price Wednesday after the market closes $125 million of seven-year convertible subordinated notes talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 22.5% to 27.5%.

There is a greenshoe option for a further $18.75 million.

Merrill Lynch is the bookrunner of the Rule 144A offering.

New River is a Radford, Va.-based specialty drug maker. The proceeds of the deal will be used to buy back about $50 million worth of New River stock, of which $40 million will be repurchased with the closing of the deal. Some of the proceeds will also be used to fund convertible note hedge transactions, and any remaining monies will be used as working capital to develop New River's attention deficit hyperactivity disorder drug NRP104.

New River stock closed at $28.05 on Tuesday, down by 0.88% or 25 cents before the deal was announced. The stock crept up to $28.07, higher by 0.07%, in after-hours trading.

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