Advanced Medical brushes off Fitch downgrade; Gilead, Amgen, Trinity gain; L-3 unchanged

By Kenneth Lim

Boston, June 9 - The convertible bond market was languid on Friday with light trading across the board, market sources said.

"You woke me up," a sellside convertible bond trader said. "I was looking at comic books on eBay."

The new Advanced Medical Optics Inc. 3.25% convertible due 2026 shrugged off a ratings cut by Fitch Ratings and improved slightly as the stock continued to climb.

Meanwhile, L-3 Communications Holdings Inc. stayed flat after the company named its chief financial officer as interim chief executive. L-3 has been speculated as a possible buyout target after the company's co-founder and former chief executive died unexpectedly late Tuesday.

In the biotechnology sector, Gilead Sciences Inc.'s convertibles gained "a little bit across the board," a buyside convertible bond trader said. The Foster City, Calif.-based biopharmaceutical company's 0.5% convertible due 2011 traded at 97.125 against a stock price of $58.25, while its 0.625% convertible due 2013 changed hands at 96.25 versus the same stock price.

Gilead stock (Nasdaq: GILD) gained 1.31%, or 74 cents, to close at $57.31 on Friday.

Amgen Inc.'s convertibles also saw modest improvements on a dollar-neutral basis. Its 0.125% convertible due 2011 traded just slightly above 97.70 versus a $68.41 stock price, while the 0.375% convertible due 2013 traded at 97.125 at the same stock level.

Amgen stock (Nasdaq: AMGN) closed at $67.64 on Friday, down by 1.13% or 77 cents. Thousand Oaks, Calif.-based Amgen is a biotech company.

In the industrial sector, Trinity Industries Inc.'s newest 3.875% convertible due 2036 gained about a point on an outright basis. The convertible, which priced June 1 after the market closed, was marked at 96 against a stock price of $51.50 on Friday. Shares of Dallas-based Trinity, a maker of railcars and inland barges, declined 1.59%, or 82 cents, to end at $50.83.

The market overall was subdued, with light trading and small movements among convertible names, traders said.

"Not a whole lot happened, although converts continue to do well," the buyside trader said, adding: "Those that were up were up like a quarter or an eighth, nothing really significant."

Another sellside trader said: "It's a Friday, we're in that slow period of the year, the World Cup has started, that's where the focus and attention is on right now."

Advanced Medical gains

Advanced Medical's new 3.25% convertible due 2026 improved slightly on a dollar-neutral basis on Friday with investors undeterred by a downgrade from Fitch Ratings.

The convertible was quoted at 105 bid, 105.25 offered versus a stock price of $48.90 late Friday, just slightly better than a bid of 104.875 versus $48.90 before the cut was announced. Advanced Medical stock (NYSE: EYE) ended at $48.25, up slightly by 0.15% or 7 cents.

Fitch on Friday lowered Advanced Medical's issuer default rating to B+ with a stable outlook but kept the company's senior subordinated convertible debt rating at B+ and the senior secured credit facility at BB+. Fitch said the cut reflected the increase in Advanced Medical's debt levels after the company raised about $500 million from the new convertibles to buy back $500 million in common stock and $100 million in existing convertibles.

Advanced Medical is a Santa Ana, Calif.-based maker of medical devices for the eyes.

A sellside convertible analyst said the Fitch rating probably did not make much of an impact because the agencies had already rated the paper. Standard and Poor's gave a B rating to the convertible on Wednesday.

The analyst added that the implied credit spread on the convertible in the market actually seemed to be closer to B- territory.

"A B+ from Fitch is probably good," the analyst said.

L-3 flat on interim CEO news

L-3's 3% convertible due 2035 was unchanged Friday after the company named chief financial officer Michael T. Strianese as interim chief executive, to replace Frank C. Lanza, who died Tuesday evening.

The convertible was seen at around 100.875 against a stock price of $77.80, although volume was considerably thinner from the previous two days, when speculation that L-3 could be a buyout target fuelled trading. L-3 stock slid 1.32%, or $1.03, to close at $76.77 on Friday.

A sellside convertible analyst said it is still not clear if any acquisition will happen, and even if it does, if an acquisition will be better for the convertibles. L-3, a New York-based defense contractor, has a strong credit and low volatility, and any company that wants to buy L-3 will probably have a good credit and low stock volatility as well, the analyst said.

"You're not likely to see much of a gain from a volatility level. Most of the guys who are likely to buy L-3 are probably low- to mid-20% vol companies to begin with," the analyst said. "The pop will have to come from the credit side, but that's not going to be much" with L-3's current credit spread already very tight.

On a more fundamental level, the analyst said L-3's convertibles still seem rich at current levels, and rival Lockheed Martin Corp.'s convertibles may offer a more compelling story.

"Lockheed has more current yield, more income pickup...they're both fully valued, but I would still be in favor of the Lockheed bond," the analyst said.

Investors chased volatility in May: analysts

Convertible bond investors sought out issues with strong credit and the potential for volatility in May as the broader convertible market was dragged down by a lackluster equity scene, say analysts at Citigroup and Lehman Brothers.

"Capitalizing on an earlier established trading strategy, convert arb funds chased vol as they bid up those convertible names positioned to benefit from an increase in volatility while not suffering negative effects from increasing spreads," Citigroup convertible analyst Adrian K. Miller wrote in a report this week. "Hence, large-cap, investment grade, short duration Vega names where better bid for most of May."

In a separate report, Lehman Brothers analyst Venu Krishna noted that convertible bond spreads tightened across the board in May despite widened spreads in other debt classes.

"We believe a portion of the tightening in convert spreads that occurred in May resulted from the market's willingness to pay up for volatility - particularly in the latter half of the month that may not be adequately reflected in the input assumptions for some of the securities in our universe," Krishna wrote.

For hedge funds, May returns are scattered across a wide range depending on how a fund was positioned, Miller wrote.

"Generally speaking, better performing funds during 2006 have been successful, in large part, by taking large single name volatility or credit bets," Miller wrote. "Primarily bets on improving credits or increases in realized vols. We have not seen many funds being successful place bets on systematic risk events."

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