Baxter puts sure to be recalled; upcoming Novellus, Household bonds likely to get sweeteners

By Ronda Fears

Nashville, Tenn., May 30 - With a last-minute sweetener to boot, analysts believe Baxter International Inc.'s convertibles will likely remain outstanding. But, Salomon Smith Barney convertible analyst Adrian Miller says the upcoming puts for Novellus Systems Inc. and Household International will likely be exercised if the issuers do not offer sweeteners, which he thinks is highly probable.

Baxter shares gained to a point Wednesday where the $800 million of 1.25% convertibles due 2021 would be worth more than the par put price, but the company added another put in one year to make certain it would not have to satisfy the cash payment.

Notice to put the Baxter bonds expired May 23, but can be withdrawn anytime before the close of business Thursday.

"The company was obviously quite keen to keep the bonds outstanding. They were quite generous," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

"Nobody in their right minds would put the bonds now. They have had a liquid bid north of 102 all day."

Salomon's Miller estimates that the additional put enhanced the value of the Baxter convertible by 3 to 3.25 points.

"Consequently, the stock's new break even was lowered to $45.75. With the stock trading at $53.55, it is almost a certainty investors will continue to hold on to their positions," Miller said.

There are another 20 to 22 convertibles that are putable during the remainder of this year, however, and while some will remain outstanding, some will likely get put.

Salomon's Miller thinks the Novellus and Household converts are among the latter.

Novellus faces an upcoming put on July 26 for its $880 million of 0% convertibles due 2031 at par, payable in cash only.

"From the standpoint of determining the likelihood of the issue being put, our analysis indicates the break-even stock price for this decision is currently at $62," Miller said.

"With the stock being approximately 18% below this threshold, it appears likely holders will put this issue."

Household is looking at a put on Aug. 2 for its $1.01 billion proceeds of 0% convertible notes due 2021. The cash only put price of $82.736 is calculated on the full $1.221 billion face amount of the issue.

"According to our calculations the break-even price for this issue is $72.25 or approximately 39% above the current stock price," Miller said.

"Even more certain than Novellus is the likelihood of investors will put this issue."

But, sweeteners are probably in store for both issues.

"It is our estimation, given the potentially large cash settlement liabilities facing Novellus and Household, incentives will be offered," Miller said.

Since both are cash-only puts, the typical 20-day notification period where management must indicate their settlement option does not come into effect, he noted. In fact, both Household and Novellus could wait until the last day, like Baxter, to announce any potential sweetener.

"Needless to say, if the incentive is substantial enough to force investors to rethink their investment decision, these stocks could witness a substantial increase in stock volatility around the two respective put dates," Miller said, adding that the volatility was primarily due to convertible arbitrage investors reestablishing their short positions.

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