Bausch and Lomb firms against falling stock; Cypress rebounds as Synaptics flattens; Rentech debut quiet

By Kenneth Lim

Boston, April 12 - Bausch and Lomb Inc. continued to keep the market busy Wednesday as its floating-rate convertible held in line with the previous day's levels even as the stock kept tumbling on a product-safety setback.

Meanwhile, Cypress Semiconductor Corp. also saw its 1.25% convertible due 2008 rebound about three points on an outright basis as the stock recovered from news a day earlier that the company may have lost some business to rival Synaptics Inc. Synaptics' convertible, which rose in line with the stock on Tuesday, hovered at the same level Wednesday as the stock edged up slightly.

Medtronic Inc.'s proposed $4 billion deal had a mixed reaction in the gray market ahead of expected pricing late Wednesday. Analysts said price talked seemed on the aggressive side, and some wondered if interest in the deal might be dampened by a market distracted by the looming long weekend.

The new Rentech Inc. 4% convertible due 2013 failed to make a bang on its debut Wednesday after the deal was priced on the cheap end of talk. Market sources said they did not see the convertible trading.

"It's a $50 million deal, there's no interest," said a sellsider.

Also active Wednesday was Safenet Inc.'s 2.5% convertible due 2010, which was seen widening as the stock continued to fall from the previous week's news that the company was scrapping an acquisition and lowering guidance. The convertible was seen holding firm at 85.5 against the closing stock price of $20.41 on Wednesday, said a trader who noted that it "opened up nicely."

For outrights, though, Safenet continues to be a concern. "You just can't trust the management team at this point," said a buy-side analyst.

Bausch and Lomb slides further outright

Bausch and Lomb's floating-rate convertible due 2023 was seen trading on Wednesday in line with the previous day's levels as the stock fell to its lowest level since 2003. Those prices were seen as better for hedged investors, but not for outrights.

"Well, BOL stock got shellacked," said a California-based convertible trader. "But the bonds have been holding nicely."

The convertible, which currently has a coupon of 5.311%, was marked at 112.4 bid, 112.9 offered against the closing stock price of $45.61 on Wednesday. The stock finished lower by $3.42 or 6.98% coming off a 14.64% drop a day earlier.

Rochester, N.Y.-based Bausch and Lomb said late Monday that it had stopped shipments of its ReNu MoistureLoc brand of contact lens solution after the Food and Drug Administration found that a number of patients with a rare fusarium fungus infection had used ReNu. The FDA has said it is too early to draw a direct link between ReNu and the infections.

Major retailers Wal-Mart Stores Inc. and Walgreen Co. on Wednesday started to pull the product off their shelves, with Walgreen deciding to stop selling the entire ReNu line.

Bausch and Lomb, which makes eye health products, said it could not estimate the impact on ReNu sales, which were about $45 million in the United States in 2005. A sell-side analyst had said the company's earnings per share could be reduced between 33 cents and 55 cents.

Moody's Investors Service on Wednesday expanded its credit rating review of Bausch and Lomb to include considering the latest developments. It rates the company's senior unsecured debt at Baa3.

Cypress rebounds with stock

Cypress Semiconductor's 1.25% convertible due 2008 was seen trading about three points better on an outright basis Wednesday, retracing the slide from Tuesday after reports speculated that the semiconductor component maker may have lost business on the next generation iPod portable media players to rival Synaptics.

"Cypress Semiconductor stock has been very volatile, those bonds have been trading actively," said a convertible trader.

The convertible, which is callable in June this year, was seen changing hands at 125.625 against a stock price of $17.10, said another trader. A major trading desk had the security marked at 126.45 bid, 126.7 offered versus the closing stock price of $17.13. Cypress stock (NYSE: CY) ended higher by 63 cents or 3.82%.

Cypress fell on Tuesday after a report by analyst Daniel Amir of W. R. Hambrecht said Synaptics will be making the next-generation trackwheel for the new iPod nanos after having lost the business to Cypress last year.

But a buy-side analyst said Wednesday that the impact on Cypress may not be that significant.

"Actually, the iPod business is pretty small for them," the analyst said.

But the analyst said the rebound for Cypress on Wednesday may also have been linked to a 4.11% gain in the stock of Sunnyvale, Calif.-based SunPower Corp., which is majority-owned by Cypress. SunPower makes solar-power products.

"Cypress rebounded I think because their subsidiary SunPower rebounded 4%, and SunPower has been pretty volatile," the buysider said. "Cypress kind of tends to be a blend of alternative energy and semiconductor, so it's not always clear why it moves."

Synaptics stays put

Meanwhile, Synaptics, which gained sharply on Tuesday, hovered around the same levels on Wednesday. Although Synaptics stock (Nasdaq: SYNA) closed just slightly higher by 0.16% or 4 cents at $25.75, a convertible trader said the name had been actively traded.

"There's just been a lot of trading in the common and people adjusting their hedge positions," the trader said. "I think they look really cheap."

The company's 0.75% convertible due 2024 was marked at 85.75 on Wednesday against a stock price of $25.75.

The buy-side analyst said Synaptics is likely to see the occasional bout of volatility in the future on iPod-related rumors.

"The trouble in general with Synaptics is they don't have any long-term purchase agreements with their customers...That's why a rumor about a new order or new design moves the shares so much," the analyst said.

Santa Clara, Calif.-based Synaptics, which also makes touchpads for notebook computers, will see its stock rally until the company reports its third-quarter results on April 20, the analyst said.

"So the trick with them is, the intrinsic value of that [non-iPod business] is probably in the high teens, probably $18, $19 [on the stock] so whenever the shares dip down to their low 20s or high teens, it's a chance to buy if you think they're going to get some Apple business."

Medtronic deal seen as rich

Medtronic's pending $4 billion dual-tranche offering of five- and seven-year convertible bonds were described as "rich" by market observers, and was seen hovering around par in the gray market ahead of a Wednesday evening pricing.

"I'm impressed that they're bringing $4 billion in paper the Thursday before Easter," said a trader.

The five-year convertibles, which were talked at a coupon of 0.75% to 1.5% with an initial conversion premium of 10%, were 99.75 bid, 100.375 offered in the gray market, said a convertible trader.

The seven-year paper, which was talked at a coupon of 1% to 1.75%, with an initial conversion premium of 10%, was seen offered at 100.375 in the gray.

Each tranche offers $2 billion worth of senior unsecured notes with a greenshoe of $200 million. Morgan Stanley, Bank of America, Merrill Lynch, Citigroup, Deutsche Bank and Goldman Sachs were the bookrunners.

"It's fairly aggressive," said a sell-side analyst of the pricing. "It's a fairly big deal, a low vol name, solid credit, but this issue is before a major holiday weekend. It wouldn't surprise me if both of them priced around the cheap end. It will sell, but I don't know if it will do as well as if it came out maybe last week."

The analyst said that on the cheap end of talk, the five-year convertible was fairly valued using a credit spread of Libor plus 15 basis points and an implied volatility of 16.9%. The seven-year convertible was 0.625 point cheap at the cheap end of talk using a Libor plus 20 bps spread and a 15.9% implied volatility.

"To me, the seven-year looks modestly more interesting," the analyst said.

A Connecticut-based analyst agreed that the convertibles modeled rich, saying the five-year convertible was 2.2% rich at the mid-point using a spread of 50 bps over Treasuries and a volatility of 15%. The seven-year convertible was 1.9% rich at the mid-point of talk using a credit spread of 60 bps over Treasuries and the same volatility.

The analyst said the deal may be attractive for outright investors because the stock "looks like it's setting up for a good run."

But the analyst did not think the coming holiday would affect interest in the offering.

"Money is money," the Connecticut-based analyst said. "I don't see that happening, if people think they're going to stop working harder."

Medtronic, a Minneapolis-based medical device maker, said it will buy back about $2.5 billion of its own stock using the proceeds of the deal. 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.

Medtronic stock (NYSE: MDT) closed at $51.04 on Wednesday, up 54 cents or 1.07%.

Rentech quiet on debut

Rentech's newly priced 4% convertible due 2013 was not seen as active Wednesday, and investors blamed the lack of interest on the small size of both the issuer and the securities, as well as concerns about the company's business model.

"Keep in mind, what kind of liquidity is it?" said a sellsider. "It's got to be cheap just to get investors interested in something like this. For this size and fairly unproven technology, it has to come cheap. It models 4% cheap, but that might be the equiv of 1% cheap for a $200 million deal."

The sellsider said the convertible may make sense for outright investors holding on for the long term.

"If something on the outright buys it, keeps it away for a couple of years they make a killing...only if the stock runs up," the sellsider said.

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