Archer Daniels Midland bid strong in gray; Medtronic retreats; Ciena gains further; XM holds steady

By Kenneth Lim

Boston, Feb. 15 - Archer Daniels Midland Co. captured the market's attention on Thursday with its planned $1 billion sale of convertibles receiving strong interest, as the rest of the market saw scattered activity across the board.

Archer Daniels Midland's offering gained in the gray market amid strong outright interest for its deal.

Meanwhile, Medtronic Inc. slipped slightly outright, retracing its day-before gains ahead of its Feb. 20 earnings announcement.

Ciena Corp. continued to advance in the wake of an equity upgrade on Tuesday and climbed a few points in line with its stock.

XM Satellite Radio Holdings Inc.'s credit held firm as the convertible found modest gains despite a slight drop in the stock.

Archer Daniels gains in gray

Archer Daniels Midland's planned $1 billion offering of seven-year convertible senior notes was bid at 100.625 to 100.875 in the gray market on Thursday amid keen interest in the deal, especially from outright investors.

"I think it's going to be a terrific deal," a sellside convertible trader said. "It's a high-quality piece of paper in a nice area, the stock's been hot, a lot of outright guys are going to want this."

The offering was expected to price Thursday after the market closed. It was talked at a coupon of 0.875% to 1.375% and an initial conversion premium of 17.5% to 22.5%. Archer Daniels Midland stock (NYSE: ADM) closed at $35.75 on Thursday, up by 2.29% or 80 cents.

The convertibles were offered at par.

There is an over-allotment option for a further $150 million.

Citigroup, JP Morgan and Merrill Lynch are the bookrunners of the Rule 144A offering.

Archer Daniels Midland, a Decatur, Ill.-based processor of agricultural products and biofuel producer, said it will concurrently buy back up to $400 million of its own stock using the proceeds of the deal. The proceeds will also be used to fund convertible note hedge and warrant transactions and for general purposes.

"It's not something you see everyday," the convertible trader said. "There's such an appeal to this stock. All too often, outright guys can't get this kind of paper. I think it's going to be oversubscribed many multiple times."

A sellside convertible analyst said the deal "definitely looks good" at the midpoint of talk using a credit spread of around 50 basis points over Libor and a volatility of 30%.

"It would price at the aggressive end, I would imagine," the analyst said. "It's an investment-grade name, a low premium and a lot of outright interest as well."

The offering attracts outright investors partly because Archer Daniels Midland common stock has slipped a fair bit in the past six months, a buyside convertible analyst said.

"Their outlook is pretty solid," the analyst said. "Demand for ethanol should continue to grow, and it's getting regulatory support. The stock's come off about $10 since May, so there's definitely potential upside."

"Their credit is solid, so there's very little concern on the downside, plus they're doing a happy meal, which should keep everyone happy," the analyst added, referring to the company's plan to buy back up to $400 million of its stock with proceeds from the deal.

Medtronic slips with stock

Medtronic eased slightly on Thursday in line with its stock a day after the stock gained on anticipation of the company's earnings announcement slated for Feb. 20.

The Medtronic 1.5% convertible due 2011 lost ½ point outright, trading at 107.375 against a stock price of $54.35, while the 1.625% convertible due 2013 also retreated ½ a point to 107.5 against a $54.20 stock price. Medtronic stock (NYSE: MDT) declined 0.95% or 52 cents to close at $54.06.

"There was a lot of activity in Medtronic today," a sellsider said.

Medtronic common stock gained 16 cents on Wednesday, following the company's announcement that it will report its quarterly results on Feb. 20. Medtronic is a Minneapolis-based maker of medical devices.

"The stock's probably down on technicals," a buyside convertible analyst said. "I don't know of anything that happened today...Investors are probably taking positions ahead of earnings, and some of them probably took profit after the stock came up yesterday."

Ciena continues gains

Ciena rode a stock upgrade to gain even higher for the second day on Thursday.

The Ciena 0.25% convertible due 2013 added another point outright to 96.625 against a stock price of $30.95, while its 0.375% convertible due 2008 also moved up a point to 97.875 versus the same stock price. Ciena stock (Nasdaq: CIEN) closed at $31.14, up by 3.56% or $1.07.

"They were up because of the equity upgrade," a sellsider said. "We're seeing buyers of the shorter, yield paper and the more equity-sensitive paper."

Citigroup equity analyst Michael Genovese on Wednesday upgraded Ciena stock to buy from hold and raised his target price to $35 from $33.

Linthicum, Md.-based Ciena, a supplier of communications networking equipment, should benefit from the strong demand for fiber-optic communications driven in large part by internet video services, Genovese wrote in a note.

"We believe the order environment for Ciena remains strong with solid visibility from a large number of customers including BT, Sprint, and Qwest," Genovese wrote. "Ciena also has a solid deferred revenues balance of over $40 million and we note that inventories have increased in the past year to $106 million from $49 million."

XM finds support

XM's 1.75% convertible due 2009 improved ½ point outright on Thursday, staying firm despite a decline in the stock.

The convertible traded at 85 against a stock price of $13.10. XM stock (Nasdaq: XMSR) fell 1.82% or 24 cents to close at $12.98.

"We continue to see that whenever the bonds drift below 85, you'll see support, so we saw some buy interest in that," a sellside convertible analyst said.

XM, a Washington-based satellite radio provider, earlier in the week entered into a sale-and-leaseback deal involving the transponders on its XM-4 satellite. The company received $288.5 million from the transaction, of which $44 million was used to retire outstanding mortgages with the remainder earmarked for working capital and general purposes.

A buyside convertible analyst said the move was slightly positive for XM's convertible.

"It's not a very big deal, but it does monetize some of their assets and gives the company liquidity," the buysider said. "The XMs are going to mature in a couple of years, so for the convert holders this adds confidence that the company will still be around in two years."

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