SafeNet improves dollar-neutral on federal probe; American Axle likely to be converted, analyst says

By Kenneth Lim

Boston, May 19 - The convertible market ended the week on a quiet note on Friday, but the new convertibles by Greenbrier Cos. Inc. continuing to see active trading a few days after their launch.

"Things started to slow down in the afternoon," a sellsider said. "I guess it's summer."

SafeNet Inc.'s convertibles were slightly better on a hedged basis as the stock crashed following reports that the company had received a federal subpoena related to the company's granting of stock options.

American Axle and Manufacturing Holdings Inc. continued to trade around par after the company said investors could receive their accreted principal in cash if they converted their notes. Meanwhile, an analyst said bond holders were more likely to prefer getting back cash than holding on to paper with just a 2% coupon.

CuraGen Corp.'s 4% convertible due 2009 also improved about half a point on an outright basis as the stock enjoyed a slight rebound following weeks of declines. The convertible was seen trading around 70.375 against a stock price of $3.18, while CuraGen stock (Nasdaq: CRGN) climbed 6.44% or 21 cents to close at $3.47.

"It's been quiet the last couple of days, but today it was very active," the sellsider said. "I think it's less to do with vol, more of a bit of credit tightening."

Investors may be betting on bounce in the stock price, the sellsider said, noting that CuraGen has some data due in June. CuraGen is a Branford, Conn.-based biopharmaceutical company.

SafeNet credit firm amid probe

SafeNet's 2.5% convertible due 2010 was lower on an outright basis but better on a hedged basis on Friday after the stock tumbled on news that the company had received a federal subpoena related to its stock option granting practices.

The convertible was seen trading at 85.75 against a stock price of $15.50 early Friday. SafeNet stock (Nasdaq: SFNT) was down to $14.93 by the end of the day, lower by 22.28% or $4.28.

"It was better dollar neutral," a sell-side convertible analyst said.

SafeNet said late Thursday that it received a subpoena from the U.S. Attorney for the Southern District of New York relating to its granting of stock options. The company is also the subject of an informal probe by the Securities and Exchange Commission on the same issue. The announcement was the latest in a series of bad news that has come from the Belcamp, Md.-based network security solutions provider. The company's stock dove early April after the company said that it was scrapping previously announced acquisition, that it would miss its first-quarter earnings guidance and that its chief financial officer had resigned.

"They've already hit people between the eyes for a few different things," a convertible analyst said. "They guided differently for the first quarter, they had to cancel the acquisition, their CFO departed, their credibility has been called into question. That also makes things worse."

"Fundamentally things aren't too different from when the [canceled] deal came," the analyst said. "Since then they've been a little tough in terms of reporting because they've disappointed, and this whole issue with the options accounting is definitely something that psychologically is going to weigh on the stock."

The analyst said it was difficult to tell whether the stock options investigations would affect the company's credit, adding that on a preliminary basis it appeared as if investors may be concerned about the company losing some of its government contracts.

But "what everyone is worried about is a pretty remote circumstance," the analyst said. "Because SafeNet does a lot of business with the federal government, anything that resulted in a criminal case going against them could potentially mean a lot of lost business. That's a remote outcome, but it's in the back of everybody's minds."

SafeNet could receive as much as half of its revenue from government business, the analyst said. But for that business to be threatened by the investigations, "a lot of things would have to happen." The investigations will take time, and if any wrongdoing is discovered legal action will likely target individuals rather than the company.

"In the past the trend has been to indict the individual and not the company, assuming that it goes along that path," the analyst said. "The government tends to go after individuals."

Greenbrier in line, still active

Greenbrier's new 2.375% convertibles due 2026 continued to be active on Friday after a strong debut two days earlier. The convertible was quoted at 99.125 bid, 100.125 offered early Friday when the stock was at $35. Greenbrier stock (NYSE: GBX) ended at $34.91, up slightly by 0.06% or 2 cents.

"The GBX was still active, that was in line," a sellsider said.

Another trader said there has been interest in the convertible because "it was still a little bit cheap" even though it was priced late Tuesday at the mid-point of talk, which guided for a coupon of 2.125% to 2.625% and an initial conversion premium of 27.5% to 32.5%. The initial conversion premium was set at 30%.

Greenbrier is a Lake Oswego, Ore.-based maker of railcars.

American Axle likely to be converted

American Axle's 2% convertible due 2024 continued to be actively traded on Friday, and an analyst said bond holders would probably choose to convert their notes and receive their accreted principal in cash.

The 2% convertible traded as high as 100.625 on Friday. The convertible was trading at around 83 early Tuesday before the market realized that conversion of the notes could yield the principal amount in cash. American Axle stock (NYSE: AXL) closed at $17.29 on Friday, up by 5.04% or 83 cents.

"They're still trading through par," a sell-side convertible analyst said. "I don't know why you'd pay that."

American Axle on Thursday confirmed that, after a Standard and Poor's credit rating downgrade two weeks ago, investors who exercised their contingency conversion options will receive their accreted principal in cash instead of shares.

American Axle told analysts at a dinner on Thursday that "it is still not clear how many of the current holders of the convertible securities will choose to convert in the near term, as some holders have cited the 2% coupon and willingness to bide time and participate in potential equity upside as reasons for delaying any action at this time," wrote Credit Suisse equity analyst Christopher Ceraso in a report on Friday.

But "in our view, it seems likely that with a 5% Treasury yield, most holders may be inclined to convert and put that money to work," Ceraso said, adding that refinancing the $150 million outstanding convertible would cost 4 to 5 cents per share in the second half for American Axle.

"The most likely course for refinancing the $150 million convert sounds like it will be a term loan; the dilution associated with another convert (at current stock prices) is not palatable at this time," Ceraso wrote. "AXL will not want to tie up $150 million of its revolver capacity; the company would rather keep some dry powder in the event of a strike at Delphi, or to finance small acquisitions. Any larger-scale acquisitions would likely be financed separately."

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