Bausch and Lomb gains on product recall; FEI prices $100 million deal within talk

By Kenneth Lim

Boston, May 15 - The convertible bond market had a slow start to the week on Monday, with light activity scattered across the board, market sources said.

"It was incredibly quiet," a sell-side trader said. "There were a lot of quotes but no trades."

Bausch and Lomb Inc. was better on an outright basis on the back of a stock surge after the maker of eye health products announced the worldwide recall of a contact lens solution that had been linked to recent cases of a serious fungal infection.

Meanwhile, FEI Co. priced a $100 million offering of seven-year convertibles within talk as market observers described the deal as fairly interesting.

A number of the new convertibles launched the week before had fallen below par as their underlying stocks slid amid a broad equity decline.

SanDisk Corp.'s newest 1% convertible due 2013 was flattish on a dollar-neutral basis at 98.75 bid, 99.25 offered against a $61.30 stock price. The convertible was trading at about 101 against a stock price of $63.25 on May 10. SanDisk stock (Nasdaq: SNDK) closed at $61 on Monday, lower by 0.39% or 24 cents.

SanDisk is a Sunnyvale, Calif.-based maker of flash memory cards.

Amkor Technology Inc.'s 2.5% convertible due 2011, which was priced on May 11, held firm on a dollar neutral basis at 98.5 against a stock price of $10.25 on Monday after the stock slid on a downgrade. Amkor stock (Nasdaq: AMKR) slid 5.55% or 60 cents to close at $10.22.

"The stocks have all come down," another trader said.

Susquehanna Financial Group analyst Andrew Biggs on Monday downgraded Amkor stock to negative from neutral, citing the company's susceptibility to a semiconductor downturn in the second half of 2006. Amkor is a Chandler, Ariz.-based semiconductor assembly and test services provider.

"We believe the company has the most negative exposure to a potential industrywide slowdown in the second half of 2006," Biggs wrote in a research report. "This is a due to a combination of factors, including the company's low free cash flow, generation ability, high financial leverage, and uncertain legal risk."

Intel Corp.'s 2.95% convertible due 2035 was unchanged from Friday at 84.375 against its closing stock price of $19.32 on a modest gain in the stock. Shares of the Santa Clara, Calif.-based maker of semiconductor chips (Nasdaq: INTC) ended higher by 1.47% or 28 cents.

The convertible bond market in general was slow on Monday with the equity market having a mixed session after Friday's retreat. A sellsider said outright convertible investors may have been hurt in the past couple of days, but they "had a run up the past six months, more like a year, and things have gone very very well for them."

Hedged investors may be getting the volatility and the short opportunities on the stock, but climbing interest rates have hit buying activity in the convertible bond market, the sellsider said.

"Rates tick up...guys have less incentive to go out," the sellsider said.

Bausch and Lomb gains on product recall

Bausch and Lomb's floating-rate convertible bond was up on an outright basis on Monday after the stock rallied on news that the maker of eye health care products was pulling a product linked to recent infections.

The company's convertible was quoted about 3.5 points higher on an outright basis at 117.75 bid, 118.25 offered against a stock price of $49.50 on Monday. Bausch and Lomb stock (NYSE: BOL) closed at $50.08, up by 12.69% or $5.64.

"BOL stock popped up $5 today, that seems a little odd," a sell-side convertible trader said.

Rochester, N.Y.-based Bausch and Lomb said Monday it was permanently recalling its ReNu with MoistureLoc contact lens solutions worldwide, citing the possibility that the formula of the solution may increase the risk of a potentially blinding fungal infection.

The U.S. Food and Drug Administration said it supported the recall. The administration's inspection of Bausch and Lomb's manufacturing facilities did not find any problems linked to the recent outbreak of the fungal infection fusarium keratitis that led to the recall, suggesting that the outbreak was linked to the design and use of the product, the FDA said.

The market was relieved that Bausch and Lomb believed the problems were limited to the ReNu with MoistureLoc product and that the FDA supported Bausch and Lomb's move, market sources said.

"The release led to a rally because the FDA didn't say anything worse," the trader said.

But the trader said interest in the convertible was limited and quotes were "very wide" on Monday.

"It's just a pure volatility play," the trader said. "I don't know how these papers are going to go."

FEI sells $100 million deal

FEI Co.'s newly priced 2.875% convertible due 2013 was priced Monday evening within talk as the market described the deal as interesting.

The convertible's initial conversion premium was set at 32.5%, within price talk that guided for a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%, market sources confirmed.

The $100 million offering has an over-allotment option of a further $15 million.

Merrill Lynch was the bookrunner of the Rule 144A deal.

FEI is a Hillsboro, Ore.-based maker of high-end microscopes used in research laboratories and semiconductor manufacturing. It will use the proceeds of the offering to buy back or redeem some of its existing convertible subordinated notes and to repurchase some of its common stock. It may also use the proceeds for general corporate purposes.

FEI's existing 5.5% convertible due 2008 was seen trading at about 95.625 against $22 on Monday. No trading was seen on Monday in the company's zero-coupon convertible due 2023, which last changed hands at 102.28 on May 10, when the stock closed at $24.85. FEI stock (Nasdaq: FEIC) ended at $22.15 on Monday, sliding 7.86% or $1.89 after the offering was announced.

A sell-side convertible bond analyst said the offer looked "around fair value" at first glance, using a credit spread of 350 basis points over Libor and a volatility of 32%.

A buy-side convertible analyst said the FEI was "trying to shore up their balance sheet" through the offering.

"I think it looks pretty good," the buysider said. "It's not the cheapest deal, but it's nothing ridiculous."

The buysider, who was assessing the convertible as an outright investor, said FEI was a "restructuring story." The company started out producing equipment for the research and development sector and operated just like another laboratory, the buysider said.

"They were operating like you would build it and they would come, and they were focused on building cool technology and cool products," the buysider said. "But now because they have a lot of commercial customers...they're trying to restructure the company and focus on operations, restructuring their whole sales force, and the company is starting look more like a business than a lab. That's why I like it."

But the buysider said there are risks with about half of FEI's business now coming from commercial customers who are mainly in the semiconductor sector. Although FEI's sales to research labs provides "a little bit of cushion," the company is not above industry cycles, the buysider said.

"Those are expensive pieces of equipment, the selling price can be millions of dollars," the buysider noted. "Try to justify it to your CFO when sales are falling."

Still, the buysider was still upbeat about the deal.

"Maybe the point in the semiconductor cycle isn't so good, but in the long term I think it [FEI] should be OK," the buysider said.

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