Skyworks slips with stock; Xilinx gains in gray; CompuCredit firms on hedge; Peabody better bid

By Kenneth Lim

Boston, Feb. 27 - Skyworks Solutions Inc. eased slightly outright but improved on a dollar-neutral basis Tuesday as convertible market activity picked up to take advantage of weak equity markets.

Meanwhile, Xilinx Inc.'s planned $900 million offering was bid up in the gray market amid strong interest from hedge accounts.

CompuCredit Corp. also firmed slightly on a hedged basis after the stock fell on a stock downgrade.

The rest of the convertible market finally picked up on Tuesday following a week of quiet sessions.

"With China getting hit hard, it's translating into an increase in volatility here in the U.S., which is great for converts," a sellside convertible trader said. "Things are better bid."

Chinese equities fell 9% on Tuesday and sparked sell-offs in stock markets around the world on fears of a downturn. The Dow Jones Industrial Average fell 3.29% or 416.02 points to close at 12,216.24, the worst one-day fall for the benchmark since the Sept. 11 attacks in 2001.

"But what's interesting is the options," the sellsider said. "It looks as though the options market is suggesting that things will go back to normal. When you think of the different things affecting the convertible market, it's credit, volatility and new issuance. This is one of the three, and the options market is saying that it'll go back to normal."

A sellside convertible strategist noted that investors sought names with good credit and high volatility.

"Because of the downturn in the equity market, there was a rush, a flight to quality," the strategist said. "BTU [Peabody Energy Corp.] was better on a vol. basis...and people were bidding up the REITs today."

Peabody's 4.75% convertible due 2066 fell 1.5 points outright on Tuesday and traded at 100 against a stock price of $41.10. Peabody stock (NYSE: BTU) closed at $40.42, down by 5.8% or $2.49. Peabody is a St. Louis-based coal mining company.

Skyworks slips with stock

Skyworks' two new convertibles improved on a dollar-neutral basis but fell outright as a weak stock dragged the securities lower despite strong interest from investors.

The Skyworks 1.25% convertible due 2010 was 99.375 bid, 99.875 offered against a stock price of $6.70, while its 1.5% convertible due 2012 was marked at 100.125 bid, 100.625 offered against a stock price of $6.83 earlier in the day. The notes were offered at par. Skyworks stock (Nasdaq: SWKS) fell 5.38% or 38 cents to close at $6.68.

"We liked the shorter-dated ones on account of the 'shorter-datedness,'" a sellside convertible trader said. "They're down a little, but you have to understand that the stock is down about 44 cents right now."

Skyworks Solutions priced the two $100 million tranches on Tuesday before the market opened, with an initial conversion premium of 35%.

The three-year tranche was talked at a coupon of 1% to 1.5% while the five-year series was talked at a coupon of 1.25% to 1.75%. The initial conversion premium was talked at 30% to 35% for both tranches.

There is no over-allotment option.

Credit Suisse was the bookrunner of the overnight Rule 144A offering.

Skyworks, a Woburn, Mass.-based supplier of mobile communications semiconductors, plans to use the proceeds of the deal to buy back up to $50 million of its common stock, repay its outstanding debt and fund general purposes, which may include acquisitions.

A convertible analyst said the shorter tranche was naturally more appealing.

"All shorter papers, their bond floors are higher," the analyst said. "There's less risk on the credit side...We thought they all looked pretty good."

The analyst said the three-year notes modeled around 1.5% cheap at the midpoint of talk while the five-year notes appeared around 1% cheap.

Another sellsider said the notes "looked OK with the stock impact" and modeled around fair value where they priced.

"The company operationally has had a rocky last year or so, but depending on who you talk to, it looks like they could be well placed in the next three quarters and heading into next year," the sellsider said. "Not a bad pair of credit and volatility."

Xilinx advances in gray

Xilinx's planned $900 million offering of 30-year convertible junior subordinated debentures was at 100.75 bid in the gray market on Tuesday amid indications that price talk was perceived as cheap.

Xilinx stock (Nasdaq: XLNX) eased 1.37% or 36 cents on Tuesday to settle at $25.98.

The Xilinx deal was expected to price after the market closed, with talk at a coupon of 3.125% to 3.625% and an initial conversion premium of 18% to 20%.

The debentures were offered at par.

There is an over-allotment option for a further $100 million.

JP Morgan was the bookrunner of the Rule 144A offering.

The debentures are non-callable for the first seven years, after which they may be called subject to a hurdle at 130% of the conversion price. There are no puts.

Xilinx, a San Jose, Calif.-based maker of electronic equipment and systems, plans to use the proceeds of the deal to concurrently repurchase its common stock through an accelerated share buyback program and from institutional investors in negotiated transactions. It will also use the proceeds to fund general corporate purposes.

A few sellside convertible analysts had the deal modeled between 2% to 3.5% cheap.

"At the mids I modeled it out very cheap," one of the analysts said. "I expect it'll probably price at the rich end, although with this market today, they may have a hard time selling it and it may easily price at the mids. It's a long-term paper, there's no puts, it's sort of a strange structure...It's junior subordinated, so it's not a good place in the credit structure, but they don't have any other debt."

Another analyst said Xilinx had a solid credit profile with "a huge amount of cash and they generate a lot of EBITDA." But the convertible was more like a preferred stock and probably deserved a slightly wider credit spread than what would normally be used for Xilinx, the analyst said.

"I was a little bit unsure about how the market was going to perceive it," the analyst said. "It's a big deal, a good credit, but some people were unhappy with the 30-year no-put structure, and it's junior sub...There will probably be some people who just won't go for it. They think 30 years is too long, but this is the same kind of convertible investor who won't take any risk beyond five or seven years."

The analyst reckoned that the deal would appeal more to hedge investors than outrights.

"I think it would be mostly for hedge guys," the analyst said. "It's hard to make this work for outrights because it's a very long-dated piece of paper, not a real hot coupon, so there's not much downside protection."

But a third convertible analyst thought outright investors could find the deal interesting, based on how the Intel Corp. 2.95% convertible due 2035 was trading. The Intel convertible's structure is similar to Xilinx's, the analyst said.

"I imagine there would be a fair amount of outright interest in the name, partly because they're sort of similar to Intel," the analyst said. "I don't think they look that attractive also [for outrights], I'm just looking at what's out there that's similar."

CompuCredit falls on downgrade

CompuCredit's 5.875% convertible due 2035 slid about 2 points outright but firmed on a hedged basis after the stock fell on a downgrade.

The convertible traded at 91.125 against a stock price of $30.75 on Tuesday. CompuCredit stock (Nasdaq: CCRT) closed at $30.58, lower by 6.57% or $2.15.

"CompuCredit was doing a little better," a sellsider said. "I guess it's a good day to have an equity downgrade because the stock was going to go down anyway."

Wachovia Securities downgraded CompuCredit's common stock to underperform from market perform on Tuesday, citing a deterioration of the company's earnings quality. CompuCredit is an Atlanta-based consumer credit company.

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