Micron trading lighter as outright buyers hold on; several drug issues gain

By Ronda Fears

Nashville, Jan. 30 - New supply from Micron Technology Inc. was gobbled up amid very strong demand that pushed it nearly 3 points higher in the gray market but activity subsided sharply out of the gate, where it languished at or near par.

Beyond the new deal stir, traders said there were several biotech and pharmaceutical issues active - Elan Corp. plc, King Pharmaceuticals Inc., Medimmune Inc. and Affymetrix Inc. to name a few.

"We didn't see as much [trading in the new Micron convert] as usual," said a convertible trader at one of the lead underwriting firms for the deal. "Certainly, it trailed off significantly from the gray."

"A lot of this went to outright accounts," the trader added, noting these investors bought the deal to hold rather than flip it in the first few days of trading.

Micron upsized the deal to $550 million from $500 million with the books rumored to be running as much as 12 times oversubscribed.

But it was priced tighter than yield price talk with a 2.5% coupon and at the rich end of premium guidance with a 40% initial conversion premium.

The new Micron convert was quoted closing at 100.125 bid, 100.375 ask after ending Wednesday 2.75 points bid, 3.0 points offered over par in the gray market.

The trader said the issue never sank below par but dipped to par after hitting the 103.25 bid, 103.75 ask mark once during the session.

Micron shares closed off 11c to $8.31.

While sellside analysts thought the Micron deal was rich and most were amazed at the terms, some of the buyers were old Micron investors who made money in the name before and hope to do so again.

"Today's Micron deal sure is different from the one in 1996, when they gave us 7s up 70% - terms that inspired me to coin the name 'Original Issue Busted,'" said Barry Nelson, a convertible fund manager at Advent Capital Management.

"Yet, Micron stock sure is cheap by historical standards. Unsurprising, given that Micron's business environment could hardly be worse. Yet, we're impressed by the strength of Micron's balance sheet after so many lean years.

"If Micron's prospects look brighter, the stock is highly likely to move a lot higher. And if Micron's prospects deteriorate further, the company has fresh capital to carry it through the storm.

"Hence, the convertible looks like it offers a lot more upside than downside, despite the relatively low coupon and the relatively high conversion premium. We've made money in Micron in the past. We're in again."

Moreover, many investors like the volatility in Micron.

But the credit story is the sticking point for many, as well.

"Micron looks like an okay vol trade," said Michael Revy, manager of a hedge fund for Froley Revy.

"On a hedged basis, it looks like the issue will have interest, but I have to get more comfortable with the credit to make any big commitments."

Micron's recently acquired Toshiba DRAM plant for $300 million makes it look aggressive in the business, he said, which could provide good leverage if DRAM prices turn around.

But, Levy added: "DRAM is also a bit of a commodity business, so I have to do more work on what gives Micron a competitive advantage," since it has other long term debt and "pretty anemic cash flow."

There's also the DOJ investigation into possible price fixing in the DRAM industry, he noted.

Beyond Micron, traders said there were several biotech issues active.

Elan firmed a bit as it announced the sale of its primary care business unit plus the rights to its sleep medication Sonata and muscle relaxant Skelaxin to King Pharma for $850 million.

Elan's 0% convertible due 2018 was quoted closing at 56.375 bid at one shop. The stock ended up 70c to $4.67.

But a buyside trader said the mark-up on the convertibles, from 51.5 bid at Wednesday's close, seemed rather optimistic.

"I didn't hear of a trade at that [56.375] level," the buyside trader said. "There's still the put looming out there and I don't think the comfort level increased that much from this one thing."

Standard & Poor's said it left Elan's credit ratings on negative outlook, noting the $840 million put on its convertibles.

S&P credit analyst Arthur Wong said in a release on Elan's acquisition that the company has raised more than $600 million from asset divestitures in the past two quarters and it should net roughly $625 million from the sale to King.

While Elan has more than $1 billion cash on hand, he said, the success of its ongoing restructuring program - in which Elan is aiming to raise $1.5 billion - and the strength of its cash flows from operations remain highly uncertain.

King sank on the Elan news, however, and the pain was compounded by its revenue warning.

King's 2.75% convertible due 2021 dropped 2.5 points on the day to 88 bid, 89 asked with the stock closing down $2.20 to $14.

King said revenues may be slightly below its previous estimated range of $327 million to $357 million. And that, along with the purchase, overshadowed the company saying it expects fourth quarter diluted EPS to be 39c to 41 - at the high end or slightly about its previous guidance of 37c to 40c.

Likewise, S&P said the Elan transaction would not affect the negative outlook for King.

King plans to fund the purchase with on-hand cash and use of an undrawn $400 million senior secured credit facility.

S&P's Wong said King continues to maintain a significant amount of financial flexibility with $900 million of cash on hand at Sept. 30 and $600 million still available under a universal shelf, plus free operating cash flows that amounted to $276 million for the nine months ended Sept. 30.

"What's more, King faces no significant near-term debt maturities," Wong said in a release. "The acquisition will further diversify the company's drug portfolio (Sonata and Skelaxin collectively generated $238 million in sales in 2002), and it significantly increases King's self-marketing capability."

With the stock market sinking, traders noted that the corporate bond market was better and a high-yield buyer of Sprint Corp. paper sparked a "mini-rally" in telecom converts and junk bonds.

"There was some buzz that there was a high-yield buyer for the Sprint 12s after they traded down 10 points yesterday," said a convertible dealer.

"We didn't trade any of the Sprint PCS converts, but we saw some of the other telecom names tick up."

In general, there are a few opportunities by buying a convert on a heavy hedge, if the convert is at or near the bond floor and there is some delta in the issue, said John Levin, head of U.S. convertible research at JPMorgan.

He said he's a bit bullish on a few of the credits in the energy and electric utility group.

"On a selective basis, some of these companies are going to get over it," Levin said.

© 2015 Prospect News.
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