Bausch and Lomb up dollar-neutral on debt tenders; JDS Uniphase falls outright on poor guidance

By Kenneth Lim

Boston, May 4 - The convertible bond market continued to be quiet on Thursday, with investors seeking names that had events fuelling volatility in their stock, market sources said.

Bausch and Lomb Inc.'s floating-rate convertibles fell with its stock but improved on a dollar-neutral basis after the company announced a major debt buyback program that analysts say may not have a severe impact on the company's credit.

JDS Uniphase Corp.'s disappointing forecast as it announced a third-quarter loss sent the convertibles down with its stock, but a buysider said the selldown in the stock could be overdone.

"I think the market is so starved for volatility that any name where the stocks crash, especially when it's a decent credit like Bausch and Lomb, guys just chase after it," said a sell-side trader, who thought trading was "a little more brisk" than earlier in the week.

Also seen trading on Thursday were the XM Satellite Radio Holdings Inc. convertible bonds, which were "better bid" after the stock bounced back from a slide on Wednesday. The company's 1.75% convertible due 2009 have been active this week, but quietened on Thursday with only a handful of trades. The convertible last changed hands higher by about a point on an outright basis at 83 on Thursday, when the stock closed higher by 3.14% or 55 cents at $18.06.

"The XMSRs were better bid," the strategist said. "The stock bounced back, we saw good active two-way flow."

XM's convertible slid slightly on Wednesday after two lawsuits were filed by shareholders charging the company's executives of reducing their own stakes in the Washington, D.C.-based satellite radio broadcaster while misleading shareholders about the company's costs. XM (Nasdaq: XMSR) has said it will defend itself against the allegations.

MGI Pharma Inc. was unchanged from Wednesday as interest in the company's convertible slowed a day after the stock soared on news of successful drug approvals for the biotech company. MGI Pharma's 1.682% convertible due 2024 closed at 65.375 against the closing stock price of $19.20. MGI stock (Nasdaq: MOGN) closed slightly lower by 0.41% or 8 cents.

The convertible strategist said the MGI convertibles were "better buys," with "swap sellers and outright buyers for the most part."

A convertible bond trader noted that "the stock up until yesterday [Wednesday] had languished."

"I think these bonds could start to get interesting," the trader said. "They're already interesting. A 6% yield and a 40% premium is attractive for a biotech company."

But the trader said the original issue discount of the convertibles limited their attraction. The convertibles were issued at $747.62 apiece, a discount to the principal amount, and switch from cash pay to accruing interest at 2.25% annual rate starting in 2011.

Bausch and Lomb firms on debt tenders

Bausch and Lomb's floating-rate convertible due 2023 fell on an outright basis on Thursday as its stock dropped on news of a major debt buyback program, but traders said the convertible bonds were better on a hedged basis.

The convertible, which currently has a coupon of 5.31%, was trading about one point lower on an outright basis on Thursday. A convertible trading desk had the security marked at 111.5 bid, 112 offered against a stock price of $41.25 late in the day. Bausch and Lomb stock (NYSE: BOL) closed at $41.19, down by 6.32% or $2.78.

Bausch and Lomb late Wednesday announced plans to tender for $383.87 million of outstanding straight debt, offering to pay bondholders the full principal amount if they accept before May 17, and less one dollar per $1,000 if they accept between May 17 and the final deadline of June 2.

The Rochester, N.Y.-based maker of eye health care products also asked convertible bond holders for waivers related to Bausch and Lomb's late annual report filings. The company is offering convertible bond holders one dollar per $1,000 principal amount for every month between June and October that it fails to file its 10-K documents. That means convertible bond holders can collect up to $4 per note if they accept, provided the company fails to file its documents before October 2006.

The company said the offers will allow it to "prudently manage debt and the related future interest expense," and added that it had enough cash to fulfill the offers.

Bausch and Lomb, which stopped selling its ReNu with MoistureLoc contact lens solution products in the United States in April amid concerns about links to a fungal eye infection, also confirmed on Thursday that a handful of infections have also emerged in Europe. Infections had earlier also been found in Asia.

The Food and Drug Administration is still investigating the cases in the United States, and no clear link has been determined.

Despite the negative news, the Bausch and Lomb convertibles managed to hold up on a dollar-neutral basis, market sources said.

"These bonds got a lot better today," said a sell-side trader, adding: "There's been significant fallout in Bausch and Lomb, and people are buying on expectation of more volatility in the future."

A Connecticut-based convertible analyst said that the debt buyback offers did not seem to be worrisome on a credit level, noting that Bausch and Lomb has plenty of cash and has products other than the ReNu line that could continue to sell.

"On a net debt basis, they're going to spend the cash on the debt, so their net debt isn't really going to change that much," the analyst said. "Cash on hand would go down by around $300 million to $400 million, but they're pouring around $100 million EBITDA on the books every quarter."

"They're a big company with a lot of products," the analyst said. "It sucks for the stock, but the company was not levered to start out with, and therefore it has a lot of room before you'd say there was a credit crunch here."

"On a net debt basis, it doesn't really change," the analyst added. "If people are really freaked out, I would certainly say take the tender offer."

The analyst acknowledged that some convertible bond holders may try to get more out of the company in exchange for the consents, but ultimately "they should have the consents that they need."

Another convertible analyst in New York said that, at first glance, the amount they are offering for the waivers seemed to be very little.

"They're offering $1 per bond, which is really 10 bps, which is like 10 cents on the bond, which is a really small amount," the analyst speculated. "They may have to offer more."

JDS Uniphase falls on results

JDS Uniphase's zero-coupon convertible due 2010 fell about two points on an outright basis as the stock dropped 6.89% on disappointing earnings.

The convertible last traded at about 96 as the stock finished at $3.39. JDS Uniphase stock (Nasdaq: JDSU) finished 25 cents lower.

JDS Uniphase reported late Wednesday a third-quarter profit of $3.7 million compared to a loss of $38.6 million in the year-ago period. But excluding gains from selling investments, the company had a net loss of $2.8 million. JDS Uniphase, a San Jose, Calif.-based optical networking equipment supplier, also guided for revenue of $302 million to $322 million in the current quarter. The mid-point of that range fell below Wall Street estimates of about $317 million.

"I think it's a good buying opportunity, and I think it's an overreaction to the guidance," said a buy-side convertible analyst.

JDS Uniphase's management had explained that their guidance was conservative because the company has gone through some operational restructuring and new regulations in Europe involving certain products make it difficult to predict with certainty how the current quarter will turn out, the analyst said.

"But overall, if you look at what they're saying about the pricing trends for the communications components, it was very solid," the analyst said. "It's just sort of a longer-term play."

The analyst also noted that JDS Uniphase's peers have also been reporting good numbers, so he was "not concerned about JDSU at all."

The company's convertibles are an attractive way to gain exposure to the company, the analyst said, calling it a "fairly balanced convertible." The company's credit is also improving.

"The company actually broke even last quarter and this quarter," the analyst said. "All that means is that there's a good floor, and it's just going to be improving."

"If you like the stock for its value, it's [the convertible] not a bad way to play it," the analyst said.

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