Bausch & Lomb unmoved by fading hopes of rival offer; Amgen, Intel, Ford recover; market still cautious

By Kenneth Lim

Boston, June 8 - The convertible market took a breather on Friday as investors were feeling cautious following Thursday's tumble.

Bausch & Lomb Inc. shrugged off concerns that analysts may emerge from a meeting with Advanced Medical Optics Inc. concluding that there would not be any merger or acquisition between the two companies.

The convertible market bellwethers mostly recovered as their stocks improved after falling for most of the week.

Amgen Inc.'s 0.125% convertible due 2011 gained a point outright to trade at 91.375 against a stock price of $56.75, while its 0.375% convertible due 2013 also rose a point to 87.625 versus a stock price of $56.625. Shares of Thousand Oaks, Calif.-based Amgen (Nasdaq: AMGN), a drug maker, rose 1.29% or 73 cents to close at $57.37.

Intel Corp. was also a point better with its 2.95% convertible due 2035 trading at 91 against a stock price of $21.70. Intel stock (Nasdaq: INTC) closed at $21.83, up by 2.44% or 52 cents. Santa Clara, Calif.-based Intel is a semiconductor chip maker.

Ford Motor Co.'s 4.25% convertible due 2036 was ½ to ¾ point better at 113.5 versus a stock price of $8.20. The Dearborn, Mich.-based auto maker saw its stock (NYSE: F) add 2.23% or 18 cents before finishing at $8.24.

"I would say most of the names were a little better," a buyside convertible trader said. "There was probably some overselling yesterday [Thursday] and today you saw a bit of bargain hunting. I think things are definitely at a more normal level now, if you can call it that."

The trader said the market continues to be skittish.

"I don't think people are feeling more confident after today's rebound or if they're feeling pessimistic after yesterday's fall," the trader said. "My feeling is that most guys are still trying to figure out where this market's going. They'll probably sleep on it over the weekend and wait a couple of weeks when more information comes out before anyone feels like they're on solid ground."

A sellside desk analyst said volume was thin on Friday mostly because of that sense of cautiousness.

"I think people are just kind of sitting around and waiting to see how it goes," the analyst said. "Obviously you don't see any new deals to stir things up because it's a Friday and nobody launches deals on Fridays."

But the analyst said that new convertible issuance could put on the brakes further down the road if the markets continue to be weak, although in the near term the primary market is likely to go ahead as scheduled.

"My understanding is that there will still be a bunch of people already waiting to issue convertibles," the analyst said. "I don't know how much there is and whether anyone is putting their plans off. It could dissuade guys a little further down the road, with the stocks down 10% since the last week. I'm thinking at this point there aren't too many guys who pulled the plug."

The analyst said the prospect of rising interest rates will probably not encourage potential issuers to issue convertible debt earlier. Rather, stock prices have a bigger impact on decision making, the analyst said.

"Issuance is pegged most closely with equity performance," the analyst said. "When interest rates go up the differential in the coupon is going to widen out between that of a convertible and a straight bond, so when interest rates go up people will want to issue convertibles rather than straight debt."

Bausch & Lomb flat

Bausch & Lomb's six-month Libor plus 50 basis points convertible due 2023 was unchanged on Friday as investors mostly ignored a pending meeting between potential acquirer Advanced Medical Optics and analysts.

The Bausch & Lomb floater was 126.75 versus a stock price of $68.50 on Friday. Bausch & Lomb stock (NYSE: BOL) closed at 69.75, up by 1.82% or $1.25.

"I don't think people are too worked up about the EYE deal," a sellside convertible trader said. "Most people don't expect a bid to come from EYE at this point."

Advanced Medical Optics on Friday was slated to meet with analysts. The Santa Ana, Calif.-based eye health products and equipment maker is in the midst of a contact lens solution recall sparked by concerns of a link to a rare eye infection. The recall came just days after Advanced Medical said it was considering whether to make an offer for Rochester, N.Y.-based Bausch & Lomb, also a maker of eye health product. Bausch & Lomb is currently seeking superior bids to a $65 per share offer by private equity firm Warburg Pincus.

"I think the dominant view right now is that EYE isn't going to be making a bid for Bausch & Lomb," a sellside convertible analyst said.

"They've got their hands full right now, and with the recall and the weak stock market, it doesn't look like they have enough to make an offer. The problem is that EYE doesn't have enough money and it probably won't want to incur the debt required to make an all-cash offer, so they're probably going to have to offer some stock if they want BOL. But now that EYE stock is doing so poorly, any offer they make will be highly dilutive and probably won't be worth the effort."

But the analyst said the lack of an Advanced Medical offer is unlikely to faze convertible holders.

"This isn't going to keep anyone up at night," the analyst said. "As it is, the BOL floaters aren't that great in terms of takeover protection, so I think most people, or at least the hedge guys, were already resigned to not making anything much out of this. Anyway, we're already one-third of the way to the deadline for BOL to find a better offer, and EYE was one of the best candidates. At this point, I don't think anyone's putting much hope in a better deal coming out."

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