New SafeNet convertibles gain with shares; technology and biotech firmer; LabCorp gains

By Rebecca Melvin

Princeton, N.J., Dec. 8 - The convertibles market was active for a second consecutive day, with better bids leaving many names firmer, particularly in the technology and biotechnology sectors, traders said.

The debut of SafeNet Inc.'s 2.5% convertibles and other new issues that priced this week livened up trading as well, they said.

The new SafeNet convertibles jumped out of the gate at 101 bid, 102 offered, and closed slightly higher at 102.125 bid, 102.625 offered. Shares of the Belcamp, Md.-based security-services software company advanced 85 cents, or 2.57%, to $33.89.

Teva Pharmaceutical Industries Ltd. was mentioned in trade as slightly higher as its shares edged higher. Also mostly better were the convertibles of Advanced Micro Devices Inc. and Micron Technology Inc., which saw their shares lower.

Laboratory Corp. of America Holdings' convertibles gained about 3.5 points after the Burlington, N.C.-based independent lab services company said that it was buying back about $500 million worth of shares.

Quieter on Thursday after more than a week of active trade was Calpine Corp., which nevertheless saw its convertible 4.75% and 6% bonds slump again to 19.5 and 10, respectively, even as the struggling power producer negotiated an agreement with bondholders to stave off a declaration of default on second lien debt without immediately restoring $313 million to an escrow account.

Also absent among actively traded names on Thursday were some of the oil services companies, which were quiet despite higher oil prices and underlying stocks.

"What we didn't see today that was surprising were some of the energy services names like Schlumberger and Halliburton," a New York-based sellside trader said.

But Headwaters Inc., a South Jordan, Utah-based energy services company, saw better buyers on Thursday after several weeks of weakness gave way to higher shares.

Citi sees arb down 3.2% YTD

So far this month, new issues have livened up trading that for much of October and November was in the doldrums.

"On the heels of redemptions and fears of redemptions the convertible arbitrage strategy experienced its second consecutive monthly set back during November," according to a monthly snapshot report from Citigroup Global Markets.

In the report, Citigroup said that anecdotal evidence suggests that the convertible arbitrage strategy is down about 3.2% for the year, and many are down as much as 6.0%.

With 11 months of 2005 down and only a couple of weeks left, Citigroup said there are some technical factors that work in favor of the convertible market and the posting of positive returns.

Taking the last month of the last 12 years, Citibank found that in most cases both the convertible market outright and the arb strategy posted positive returns.

Convertible arb only saw two occurrences, in 2000 and 2001, when December didn't serve either to shore up a weak year or make a good year better, the bank said.

SafeNet was a safe bet

The convertibles that SafeNet priced late Wednesday traded actively Thursday in the aftermarket, moving up mostly in line with its shares.

The issue was seen cheap using a credit spread of Libor plus 400 basis points and a volatility in the low 30% range, according to a New York-based sellside trader.

There was some difference of opinion about the borrow, the sellsider said. "Our stock loan indicated that it was tightening up," but it may have been adequate as it traded pretty actively.

SafeNet priced $225 million of five-year convertibles to yield 2.5% with an initial conversion premium of 25%, coming in at the midpoint of price talk.

The Rule 144A deal was sold via bookrunner Merrill Lynch and there is a $25 million greenshoe.

"It was a good little deal," a syndicate source said.

LabCorp convertibles gain 3.5 points

LabCorp's 0% convertible closed out the session at 75.5, up about 3.5 points on the day outright, according to a trader, who said the issue traded very actively and in a wide price range Thursday.

Late Wednesday LabCorp announced a $500 million stock repurchase program, half of which it accomplished immediately in a transaction with Bank of America, NA by using bank borrowings. The company plans to partially repay the bank debt with an offering of $250 million of 10-year senior unsecured bonds. That offering was announced Thursday.

LabCorp shares jumped by $2.30, or 4.42%, to close at $54.34.

LabCorp conducts independent lab work such as drug and alcohol testing in addition to blood cell counts and other clinical services.

Proceeds from the bond offering will be used, along with cash on hand, to repay the bank debt.

The remainder of the share repurchase program will be purchased in the open market from time to time, the company said, with funds from its existing senior credit facility, future offerings of debt or other credit facilities, or cash on hand.

The LabCorp converts opened at 76.5 and were weaker at about 69 toward midsession, but climbed to as high as 76.785 later in the day, before easing back a bit.

Moody's Investors Service has rated the new LabCorp notes at Baa3. Standard & Poor's Corp. has rated the issue BBB.

Moody's said the rating and outlook assume that the company will be able to accumulate cash to prepare for a put on its 0% convertibles, which comes in September 2006 at a potential liability of $530 million.

The rating agency anticipates LabCorp will generate annual operating cash flow of between $570 million to $600 million, and free cash flow of $475 million to $500 million over the next two years, resulting in an adjusted operating cash flow to adjusted debt ratio of 40%.

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