Bausch and Lomb wider on product scare; Synaptics gains on iPod rumors; Medtronic plans $4 billion deal

By Kenneth Lim

Boston, April 11 - Bausch and Lomb Inc.'s floating-rate convertible bond due 2023 opened up about two points on Tuesday, turning profitable for hedged investors as the stock crashed after the company stopped shipments of a contact lens solution product amid concerns of eye infections.

"It was fantastic for current [hedged] holders of the bonds," said a sell-side trader.

Meanwhile, Bausch and Lomb rival Advanced Medical Optics Inc.'s convertibles gained on an outright basis in line with the stock as investors bet on the competitors taking advantage of the product halt.

Also gaining on an outright basis on Tuesday was Synaptics Inc.'s 0.75% convertible due 2024, which benefited from reports that the company may have secured contracts to manufacture components for the next generation of iPod portable media players.

From the primary market, Medtronic Inc. unveiled plans for a giant $4 billion offering of convertible bonds in two equal tranches, with over-allotment options of a further $200 million on each tranche. The planned five-year paper was talked at a coupon of 0.75% to 1.5% while the proposed seven-year convertible was talked at a coupon of 1% to 1.75%, market sources said. The initial conversion premium for both tranches has been set at 10%. Pricing is expected Wednesday after the market closes.

The gray market, meanwhile, showed no interest on Tuesday for Rentech Inc.'s planned $50 million offering of seven-year convertible bonds. Pricing was expected after the market closed.

Rentech's deal was talked at a coupon between 3.5% and 4% with an initial conversion premium of 18% to 22%. It has a greenshoe option of a further $7.5 million. The deal is being offered concurrently with an issue of 12.5 million shares with an over-allotment option of 1.875 million shares.

Other active names on Tuesday included Amylin Pharmaceuticals Inc, whose convertibles traded slightly lower along with a slide in the stock. The San Diego, Calif.-based biopharmaceutical company's 2.25% convertible due 2008 was marked at 143.25 bid, 144.25 offered versus a stock price of $44.40 mid-day as the stock fell about 1 percent from the previous close. Against the same stock price, the company's 2.5% convertible due 2011 was marked at 142.25 bid, 143.25 offered. Amylin stock (Nasdaq: AMLN) ended at $44.64, down 23 cents or 0.51%.

ON Semiconductor Corp.'s zero-coupon convertible due 2024 also fell about 2 points on an outright basis as the stock slid 4.32% over the day. The convertible was seen at 87.875 bid, 88.875 offered against a stock price of $6.75 on Tuesday, said a sell-side trader. It was marked at 86.44 bid, 87.44 offered versus the closing stock price of $6.64 at another trading desk. ON Semiconductor stock (Nasdaq: ONNN) closed the day down by 30 cents.

Bausch and Lomb widens 2 points

Bausch and Lomb's floating-rate convertible bond due 2023 was seen widening about two points on Tuesday as the stock crashed on news that shipments of the company's contact lens solution had to be stopped after the product was linked to eye infections.

The convertible, which currently has a coupon of 5.311%, was seen trading at 114.75 against a stock price of $47.50. Although the convertible was better on a hedged basis, it was about 10 points lower outright from levels the day before. Bausch and Lomb stock (NYSE: BOL) ended the day at $49.03, down 14.64% or $8.41.

"That's the story of the day," said a buy-side trader.

Bausch and Lomb late Monday stopped shipments of its ReNu MoistureLoc brand of contact lens solution in the United States after some users were found with a rare and serious fungal infection. The Rochester, N.Y.-based maker of eye health products had suspended ReNu sales in Singapore and Hong Kong in February on reports of similar infections, but later said tests did not have evidence that suggested the ReNu products were the cause.

The Food and Drug Administration said Monday that it had received 109 preliminary reports of patients infected with the fusarium fungus, and 26 of 30 patients interviewed so far used ReNu products. But the FDA said it was too early to infer a direct link between ReNu and the infections.

A sell-side convertible analyst said "it's going to take a while for people to feel more comfortable with more clarity" before the stock will recover, and the news was negative for Bausch and Lomb's credit.

"The company actually said that revenue at risk is about $45 million, but I think the reality is it's going to be more than that," the analyst said. "If you believe that only $45 million is at risk, the stock wouldn't be down by $10. The market is saying it doesn't believe that."

The convertible analyst said the earnings per share loss could be anywhere from 33 cents to 55 cents, which is more than 10% of estimated earnings per share in 2006. "That's why the stock is down as much as it is."

But another New York-based sellsider said the stock movement was an opportunity for existing convertible holders. The stock "will continue to be volatile in the near term, and if this gets worked out, there's a fair amount of people out there probably thinking this is an overreaction," the sellsider said.

Market sources said the investors who benefited the most from the news were those who were already holding the convertibles and hedged against the stock. But a California-based fund manager who did not have a position in the convertible said it was "a disaster" for outrights.

And it may be too late for investors who don't already hold positions.

"It was fair to rich before," said a sell-side trader. "They opened up post-news, so it just got that much richer. I don't see any value now."

A buy-side trader said it was "a pity" he had decided earlier not to take a position in Bausch and Lomb, and there was no point going in now.

"You wouldn't be able to get in on a heavy enough hedge," the trader said. "You really can't put it on that high now. The reason is no longer there."

Advanced Medical Optics gains

Bausch and Lomb's trouble was good news for rival Advanced Medical Optics, which saw its convertibles trade about 4 points higher outright in line with the stock Tuesday.

"The stock traded better on the back of the BOL news, so that stock was up about 6%, so those bonds did well," said a buy-side trader.

The Advanced Medical 1.375% convertible due 2025 was marked at 112.46 bid, 113.46 against the closing stock price of $48.48 on Tuesday, while the 2.5% convertible due 2024 was marked at 111.63 bid, 112.13 offered versus the same stock price. Advanced Medical stock (NYSE: EYE) ended up $3.01 or 6.62%.

The halted shipments by Bausch and Lomb was an opportunity for Advanced Medical to "pick up share as consumers switch to alternative products," Bear Stearns equity analyst Milton Hsu said in a report.

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

Synaptics up on iPod rumors

Synaptics convertibles improved about two points outright from last week's levels after the stock surged on reports that the maker of electronic touchpads and scroll wheels may have won back business on the next generation of iPod portable media players.

"That one was better to buy today, no doubt," said a buy-side trader.

The Synaptics 0.75% convertible due 2024 was seen trading at 85.5 against a stock price of $25.75 on Tuesday. Synaptics stock (Nasdaq: SYNA) closed at $25.22, up by 4.21% or $1.02.

W. R. Hambrecht analyst Daniel Amir said in a report this week that Synaptics will be making the next generation trackwheel for the new iPod nanos expected to be released later in the year, and estimated that the new business could add $10 million to revenue for the Santa Clara, Calif.-based company.

Synaptics said in 2005 that it had lost its iPod business to Cypress Semiconductor Corp., but analysts this year have started to speculate the it could be winning back some of the lost business. The company also continues to have promising businesses from notebook computers, said the trader.

"When they lost the contract with Apple, the stock got hammered," said the trader. "But they still got business with laptops, and it's a pretty volatile stock and it's always been a pretty strong credit."

"I've been trying to get my clients involved in this name," said a sell-side trader who remarked that he managed to make a little from the name.

But the convertible remains "a tough name to trade," the sellsider said. "People's hedges are pretty buried."

Medtronic plans $4 billion deal

Medtronic said Tuesday it plans to offer $4 billion of convertible senior unsecured notes in two equally sized tranches due 2011 and 2013 with initial conversion premium set at 10%.

The five-year convertibles are talked at a coupon of 0.75% to 1.5%, while the seven-year securities are talked at a coupon of 1% to 1.75%. Each tranche has an over-allotment option of a further $200 million.

Pricing is expected Wednesday after the market closes.

Medtronic will also carry out convertible note hedge and warrant transactions and expects the warrants to have an exercise price at a 50% premium to the common stock price.

Morgan Stanley, Bank of America, Merrill Lynch, Citigroup, Deutsche Bank and Goldman Sachs are the bookrunners of the Rule 144A deal, the second-biggest so far this year.

A convertible fund manager said the company's existing 1.25% convertible bond due 2021 is putable in September 2006, and Medtronic may have "figured that this is a cheap time to lock in the financing before rates go higher."

But the fund manager did not find the deal exciting. "It's a nice credit, you're not going to get hurt, but it probably trades pretty bond-like."

Medtronic, a Minneapolis-based medical device maker, said it will buy back about $2.5 billion of its own stock using the proceeds. The repurchase amounts exceed the outstanding 36 million shares in its current stock buyback program. Part of the proceeds will also be used to fund the convertible note hedge transactions. Any remaining proceeds will be used for general corporate purposes.

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