McData gains with offer; Teva rides earnings boost; Scottish Re firms as put stays; Charter slips on loss

By Kenneth Lim

Boston, Aug. 8 - Action in the convertible bond market on Tuesday was focused on a handful of names, with McData Corp. bursting to life after Brocade Communications Systems Inc. offered to buy it for $713 million.

Meanwhile, Teva Pharmaceutical Industries Ltd. rose in line with its stock, driven by strong second-quarter earnings and favorable sentiments for generic drug makers.

Scottish Re Group Ltd. was flat to slightly better on an outright basis as the company confirmed that the put date for its 4.5% convertible due 2022 was in December 2006. Scottish Re said parts of the indenture that placed the put a year later were mistakes and would be amended.

From the primary market, two real estate investment trusts launched deals expected to price Wednesday after the closing bell. BRE Properties Inc. is planning a $350 million offering to help reduce its debt, while Digital Realty Trust Inc. has proposed a $150 million deal also to lower its borrowings.

The convertible bond market overall was slower than expected, with the Federal Reserve's Tuesday decision to maintain current interest rates largely expected, market sources said.

"Nothing's really changed here," a sellside convertible bond trader said. "Financings are going to change...The effect was when they started hiking. This was pretty much expected."

A convertible bond fund manager said the Fed's decision to pause interest rates at 5.25% was "no surprise."

"I would have been more excited if the Fed cut rates by 25 points or raised them by 50 points," the fund manager said, noting that any optimism about a break in the interest rate hikes is offset by the fact that signs of a weak economy drove the decision. "It's really kind of a dull outcome, I think."

Also trading on Tuesday was Charter Communications Inc.'s 5.875% convertible due 2009, which slipped about 2 points outright but was firmer on a dollar-neutral basis after the company reported a wider second-quarter loss. The convertible traded at 81.5 against a stock price of $1.20, while Charter stock (Nasdaq: CHTR) closed at $1.18, down by 10.61% or 14 cents.

St. Louis-based Charter Communications, a cable services provider, said Tuesday that it lost $382 million, or $1.20 per share, less than the $356 million, or $1.17 per share, it lost in the year-ago period.

Bausch and Lomb Inc.'s 6.048% floating-rate convertible due 2023 was mostly unchanged on Tuesday after the maker of eye medical products delayed its second-quarter earnings report and warned that it would significantly miss its earlier guidance for 2006. The convertible traded at 113.375 against a stock price of $45.03, while Bausch and Lomb stock (NYSE: BOL) slipped 0.67% or 31 cents to close at $46.03.

Rochester, N.Y.-based Bausch and Lomb cited ongoing investigations of its financial reporting and control systems for the delay. The company also said it now expects 2006 pretax earnings between $70 million and $80 million, less than the $325 million to $335 million it forecast before it recalled a key contact lens solution product earlier this year.

"There's no good news in there," a sellside convertible bond trader said. "But as long as they're profitable you're not going to be worried about the credit. That's why the bonds held up."

McData climbs on bid

McData's 2.25% convertible due 2010 traded for the first time in August on Wednesday, and gained about four points outright from its previous levels after Brocade said it was buying the company.

The McData convertible changed hands at 88 against a stock price of $3.10. McData stock (Nasdaq: MCDTA) closed at $3.29, up by 5.79% or 18 cents.

"They kind of came in with the stock," a sellsider said.

San Jose, Calif.-based Brocade, a developer of data storage networking solutions, said Tuesday that it will buy each McData share for 0.75 Brocade shares, or $713 million based on Brocade's Monday closing stock price. Brocade stock (Nasdaq: BRCD) fell 19.71% or $1.21 on Tuesday to close at $4.93, bringing the value of the deal to about $572 million, or about $3.70 per McData share. McData is a Broomfield, Colo.-based storage networking and data infrastructure solutions provider.

Brocade's 2% convertible due 2007, which has been defeased and will be redeemed on Aug. 22, was not seen trading on Tuesday.

The sellsider said the combined credit for the two companies was an improvement for McData, which helped to boost McData's convertible. The McData convertible's higher value also carried a premium based on the potential for another acquisition, the sellsider said.

"I don't necessarily see another buyer...but as we've seen with Andrew and CommScope and ADCT, you never know," the sellsider said.

CommScope Inc. on Monday announced a surprise all-cash bid for Andrew Corp., foiling an earlier all-stock offer by ADC Telecommunications Inc. that had fallen in value as ADC stock declined.

The sellsider said the all-stock bid by Brocade would not trigger any change of control puts for McData's convertible, but if a new offer emerged with a cash component the put option could be triggered.

"If there was a change of control put they'd be trading much closer to par," the sellsider said. This would trade up to par if there was a cash component."

Scottish Re firms as put stays

Scottish Re's 4.5% convertible due 2022 was unchanged to slightly better on Tuesday as the company confirmed that the paper may be put in December 2006, and that the indenture that places the first put in 2007 will be corrected.

The convertible was marked at 96 bid, 96.5 offered versus a stock price of $7.35 on Tuesday. Scottish Re stock (NYSE: SCT) slipped 1.96% or 15 cents to close at $7.51.

Scottish Re said Tuesday that the Dec. 6, 2007 put date used in the indenture was a "typo," and that it will be amending the document to reflect "the correct put date." Scottish Re has consistently referred to a 2006 put date in all other communications with investors - in the convertible prospectus, press releases, annual reports and conference calls.

Xtract Research, which maintains a database of legal documents related to fixed-income securities, noted the discrepancy earlier this week.

"To summarize our position, we feel it is possible the company will need to honor both dates, although they may call it a drafting error," said Xtract managing partner Michael Knox in an e-mail. "At this point, the company seems committed to calling this an error, but if this additional put had significant value to holders, there may have been more backlash."

Scottish Re did not say if it would also let convertible holders put the security in 2007.

Observers mostly expected Scottish Re's move.

"Oh, what a surprise," a convertible bond trader quipped upon learning of the planned amendment.

A convertible analyst doubted that the company would let holders put the convertible in 2007, partly because the indenture clearly had a mistake.

"Everywhere else it says '06," the analyst said.

The analyst and another sellsider also thought that holders of the 4.5% convertible were probably going to put the security back as soon as they can, based on current circumstances.

"With the stock where it is now, and the way the company is prepared to repay cash to put, it's most likely going to go away in December," the sellsider said.

Teva rises with earnings

Teva's 1.75% convertible due 2026 was higher by about two points on an outright basis on Tuesday, in line with the stock on the back of the company's strong second-quarter results.

The convertible traded at 96.75 against a stock price of $34, up by about 2 points on an outright basis. Teva stock (Nasdaq: TEVA) closed at $35.73, up by 5.21% or $1.77.

"The bonds are trading up a little," a sellside convertible analyst said. "Generics are getting a boost today with Bristol-Myers losing a patent dispute to a generic company. Generics are in a down market holding up pretty well."

Bristol-Myers Squibb Co. and Sanofi-Aventis SA on Monday lost a legal battle to block sales of the generic version of its Plavix blood-thinning pills, and will now face generic competition for the drug five years earlier than they expected.

Teva on Tuesday said that second-quarter net profit excluding items increased to $541.2 million, or 66 cents per share, from $241.2 million, or 36 cents per share, in the year-ago period. The company also raised its forecast for 2006 net earnings to between $2.15 and $2.25 per share, from between $2.02 and $2.15 that it guided for earlier.

REITs launch deals

Two real estate investment trusts announced plans to sell convertible securities, with pricing for both deals expected Wednesday after the market closes.

BRE Properties' proposed $350 million of 20-year convertible senior notes is talked at a coupon of 3.875% to 4.375% and an initial conversion premium of 25% to 30%.

There will be a concurrent repurchase of $75 million of BRE stock.

There is an over-allotment option for a further $52.5 million.

Wachovia Securities and Deutsche Bank are the bookrunners of the Rule 144A deal.

BRE Properties is a San Francisco-based real estate investment trust that develops apartment communities in western United States. The proceeds of the deal are earmarked for funding the concurrent stock repurchase, for general corporate purposes and to temporarily reduce its unsecured debt.

BRE stock (NYSE: BRE) closed at $57.47 on Tuesday, down by 1.12% or 65 cents.

Meanwhile, Digital Realty Trust's $150 million of 20-year exchangeable senior debentures is talked at a coupon of 3.875% to 4.375% and an initial conversion premium of 15% to 20%.

The debentures are exchangeable into Digital Realty Trust Inc. common stock. They will be issued by Digital Realty's operating partnership subsidiary, Digital Realty Trust LP, but guaranteed by the parent company.

There is an over-allotment option for a further $22.5 million.

Citigroup and Merrill Lynch are the bookrunners for the Rule 144A offer.

Digital Realty, a San Francisco-based real estate investment trust that focuses on technology-related real estate, will use the proceeds of the deal to reduce its debt under an unsecured credit facility due 2008. It also plans to reborrow amounts under that credit facility to fund acquisitions and for general corporate purposes.

Digital Realty stock (NYSE: DLR) closed at $28.54 on Tuesday, up by 0.67% or 19 cents.

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