Silver Standard muted on debut; EMC slips with stock; Amgen, Level 3 lower as markets end mixed

By Kenneth Lim

Boston, Feb. 22 - Silver Standard Resources Inc.'s new bond made a dull entrance to end an unexciting week for the convertible market.

EMC Corp. slipped with its stock after the company announced an acquisition aimed at boosting its online capabilities.

Week ends mixed

The convertibles market had a relatively soft week, but observers expect that the picture could get brighter as the year wears on.

"It got really bad in November and December, but it looks like it's actually not that bad now," a sellside convertible analyst said. "The spreads widened at the end of last year, but now volatility has really picked up, so I think most guys are actually doing OK."

The analyst said one concern would be that the equity markets pick up slowly without an increase in volatility, but overall the convertible arbitrage strategy should do well this year.

"I would expect it to do really well," the analyst said.

But Geoff Dancey, a securities analyst at Cutler Capital Management, noted that outright accounts have already benefited from the defensive nature of convertibles.

"The stock market, the S&P, the Dow, have all fallen," Dancey said. "In the past we've owned converts that had strong stories on the common stock. The stocks had run up in the first half of 2007, and had come back in the second half, and the equity sensitivity of our portfolio had fallen, and now we're naturally in a more defensive mode."

"So like the EMC [convertibles], it's 122 now, but it's a more defensive convertible than when the bond was at 144, so we've already taken advantage of the downside protection in many of the convertibles," he added. "Ideally we'd like to always have the downside protection, but now we're actually relying on it to protect us from losses."

Amgen weaker

Active names on Friday included Amgen Inc.'s 0.125% convertible due 2011 and 0.375% convertible due 2013, both of which eased as the common continued to slip following reports Thursday that European regulators had approved generic versions of an Amgen drug.

The shorter-dated 0.125% convertible was marked at 92.125 bid, 92.625 offered against a stock price of $47, while the 0.375% convertible was marked at 88.5 bid, 89 offered against the same stock price. Shares of Thousand Oaks, Calif.-based Amgen (Nasdaq: AMGN), a biotech company, closed at $46.43, down by 0.66% or 31 cents.

Level 3 Communications Inc.'s 5.25% convertible due 2011 also retreated, trading at 79.25 against a stock price of $2.12, about ½ point lower outright. Level 3 (Nasdaq: LVLT) common stock finished up by 7.48% or 16 cents on a late rally to end at $2.30. Level 3 is a Broomfield, Colo.-based provider of Internet backbone services.

Silver Standard up slightly

Silver Standard's new 4.5% convertible senior unsecured note due 2028 made a modest gain in its secondary market entrance, but activity slowed as the stock slipped lower over the day.

"There was a bit of trading early in the morning, but the stock came down and it's quiet now," a sellside trader said.

The new convertible was marked at 100.5 bid, 101 offered against the previous close of $33.33. Silver Standard common stock (Nasdaq: SSRI) closed at $33.12, down by 0.63% or 21 cents.

Silver Standard priced its offering Thursday after the market closed, with an initial conversion premium of 30%. Price talk was at a coupon of 4% to 4.5% and an initial conversion premium of 30% to 35%.

There is an over-allotment option for a further $18 million.

UBS Investment Bank was the bookrunner of the Rule 144A and Regulation S offering.

Silver Standard, a Vancouver, B.C.-based silver mining company, said the proceeds of the deal will be used to develop its Pirquitas project, to explore other properties and for working capital and other general corporate purposes.

Hedge accounts mostly stayed out of the deal, market sources said.

"The problem is the borrow," a sellside analyst said. "It's still pretty cheap even with reduced borrow, but you just can't get any borrow."

But outright buyers may have ended the day on a down note, the analyst noted.

"The stock is down," the analyst said. "If you bought it at 100, it's going to be below 100 today."

The analyst said the convertibles justify a wide credit spread because the company is using the proceeds to develop properties and some of those properties are in risky locations such as South America.

"I wouldn't want to do it as an outright," the analyst said. "I don't think the bonds are going to hold up that well on the downside. Let's say silver prices crumbled or Argentina has a revolution or the dollar rallied like crazy. The same reasons that will hurt the stock would hurt your credit. I think it's got like a 65% upside participation but it's like 85% of the downside. So you're almost at 100% on the downside, but just over half on the upside."

The analyst said some outright convertible funds may have taken the offering to get exposure to the sector simply because they are not allowed to get the stock. But the analyst said precious metals mining companies usually require a touch of caution from investors.

"It's a commodity business," the analyst said. "The companies on the most part are unhedged so that they can get all the upside when prices go up, and they leave it to investors to do their own hedging."

EMC slips on acquisition news

EMC's two convertibles eased after the stock fell on news that the company had recruited a new executive and bought a start-up to boost its online business.

EMC's 1.75% convertible senior notes due 2011 finished at 121.6 against the closing stock price of $15.28, down a point outright. Its 1.75% convertible senior notes due 2013 were lower by ½ point at 122.4 against the closing stock price.

EMC common stock (NYSE: EMC) eased 0.91% or 14 cents to close at $15.28 on Friday.

EMC, a Hopkinton, Mass.-based maker of computer storage equipment, said late Thursday that it was buying Pi Corp., a start-up that is developing technology that focuses on "cloud computing." Pi has about 100 engineers and will operate as an independent EMC subsidiary. The consideration for the sale was not disclosed.

EMC will also appoint Pi's founder and chief executive, Paul Maritz, as president and general manager of EMC's newly formed Cloud Intrastructure and Services Division, the company said in a statement.

A sellside convertible analyst said the announcement was unlikely to affect the company's credit significantly, but the acquisition appears to be a step in the right direction.

"Cloud computing's the in thing right now, right?" the analyst said. "Everybody's getting into it. It's hard to tell how this will affect the credit, but my feeling is it won't do much because it's not significant enough for them to report the details."

Cutler's Dancey, whose firm holds some EMC convertibles, said EMC convertibles are always an active name on the market.

"EMC is an active trader because the size of the issue was pretty big," he said. "It's a huge issue, it's almost $2 billion, and there are two bonds, so you can easily take a position in it. The EMC common is pretty active too, so it's easy to short and for the arb funds to play it. And the common doesn't pay a dividend, so there should be a lot of hedge interest. I'd be surprised if there were many outrights owning it now. Also, there may have been different combinations that you could have hedged. For example, previously people wanted to buy VMware but didn't want to buy it at the offering, so they bought EMC instead, so there were many ways for people to set this up."

Dancey said the EMC convertibles made sense when they were just issued.

"From our point of view, we like to buy when there's some downside protection," Dancey said. "We started buying this when they were around 110, which was a while ago, before [EMC spin-off] VMware's IPO. Now at the 122 level, there's not as much downside protection."

Dancey said he still likes the stock and expects it to do well, but has held off on buying more convertibles.

"It's still too equity sensitive on the downside now, the current yield is about 1.4%, the yield to maturity is about negative 3.7%," he said. "The premium when the bond was at 168 was around 7% or so, so now the premium is at 27%, so the bond obviously had some downside protection versus the stock, but not nearly as much as we would have liked."

Cutler will likely hold on to its EMC convertibles for now, he said.

"For us, the convert is a hold [and not a buy] because it's not trading close to its bond floor and it's got no yield," he said. "But I think the common stock is still undervalued."

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