Corporate Office slips on debut; Micron trades up in line after earnings; Medtronic active

By Rebecca Melvin

New York, April 1 - Corporate Office Properties Trust's newly priced 4.25% exchangeables slipped below par in secondary dealings early Thursday after pricing late Wednesday below the cheap end of price talk on the yield.

"The bonds are trading under water," a New York-based sellside trader said early on. Later Corporate Office shares retraced losses and ended the session higher by 1.3%.

The market elsewhere was fairly quiet in pre-holiday trading before the long Easter weekend. Markets are closed on Good Friday.

An exception to the trading lull was Micron Technology Inc., which saw its convertibles move higher in line with their underlying shares after the Boise, Idaho-based memory chip maker reported fiscal second-quarter earnings that swung to a profit. Later the guiding equity turned lower for a nearly 2% loss on the day.

King Pharmaceuticals Inc. traded lower early on, also in line with their underlying shares. King shares gyrated in heavy volume, spiking up mid-afternoon before settling to about the unchanged mark.

"I don't know why they were down. They were down more than half a buck," a sellsider said of King shares.

Medtonic Inc. convertibles were also a top volume name Thursday, trading slightly lower early in the day but gaining later on.

'Robust' issuance seen continuing

Fifteen new deals totaling $4.72 billion priced in March, which was up from $2.68 billion priced during March a year ago.

"It was robust," a New York-based sellside trader said, attributing strength to the increased comfort level issuers have that their deals are being accurately priced in the market.

"Nobody wants to issue and have terms improve for the next issuer. Once you have one or two deals, and you have a standard set, it gets easier, and people don't worry about being on the wrong side on it," the sellsider said.

Another factor in March new issuance was that interest rates bumped up, and the consensus shifted to the idea that interest rates are going to be on the rise, and issuers would want to get in before they do, the sellsider said.

"I think you're going to see continued strong issuance," the sellsider said.

For the year to date, new convertibles issuance stands at $7.63 billion, which is more than double the $3.48 billion in the year-earlier period.

Rates, stocks signal more deals

The increase in new deals was a welcome sight for market players looking for incremental supply after a substantial amount of redemptions. And several sources agreed with the first sellsider that strong new issuance volume is likely to continue.

Whether the increase was tied to a fairly steep rise in interest rates during the month wasn't clear. Interest rates have been volatile in the last two or three weeks, they said, and convertibles remain attractive with credit spreads tightening - or at least not widening out - in the underlying.

"I think with rates low, and the consensus of them rising, and with stock prices at recent highs, you'll see many companies come to market to further re-engineer the balance sheet," a New York-based sellsider said.

"They're crazy if they don't! In the banking area, there has been a famine in convert issuance due to the current status that common equity is the only type of security that counts. Yet I feel a slew of mergers in banking will begin soon and some may issue convertible preferreds in the process," the sellsider said. He anticipated the preferreds would get a good reception.

Notable deals in March included the largest, Cemex SAB de CV's $650 million of 4.875% convertibles, which is based on the Mexican cement company's American Depositary Receipts.

Priceline.com Inc. and the Hartford Financial Services Group Inc. both priced $500 million offerings. And Rovi Corp. and ProLogis both priced $400 million-plus offerings.

Corporate Office comes cheaper than talk

Corporate Office Properties Trust's $200 million of 4.25% exchangeables priced cheaper than the 3.5% to 4% yield talk and with a 20% premium, which was at the cheap end of talk.

Early in the session, the new convertibles were at 99.5 bid, 100 offered, in tandem with lower shares. But shares of the Columbia, Md.-based real estate investment trust recovered ground later, ending up 31 cents, or 0.8%, for the session at $40.44.

The paper was sold by RBC Capital Markets Corp. and J.P. Morgan Securities Inc.

There is an over-allotment option of up to an additional $40 million of notes, and proceeds were expected to be used for general corporate purposes, including potential repayment of borrowings under its unsecured revolving credit facility.

The exchangeables will be non-callable for five years, with investor puts in years five, 10 and 15. There is net share settlement upon exchange.

Micron higher in line

Micron's 1.875% convertibles due 2014 traded at 98.25 versus a share price of $11.00 early on. Later the paper was seen at 96 versus a lower share price.

Micron's 4.25% convertibles due 2013 traded little changed above double par.

"It moved up in line," a sellsider said of the Micron 1.5% bonds.

Shares of the Boise, Idaho-based company opened higher by 6% after posting strong earnings after the close on Wednesday. But shares faded during the session, and ended lower on the day, closing down 20 cents, or 1.9%, at $10.18.

Fiscal second-quarter earnings for Micron totaled $363 million, or 39 cents a diluted share, on sales of just under $2 billion, compared to a loss of $763 million, or 99 cents a diluted share, on sales of $1 billion in the year-earlier period.

The results were better than expected, as analysts had been expecting earnings of 24 cents per share on sales of $1.83 billion.

Medtronic actively traded

Medtronic's 1.5% convertibles due 2011 - which were the company's most actively traded issue - were at 101 late in the session, up from 100.621 on Wednesday. Early Thursday, the convertibles traded a little lower with a 99 handle.

"It was mostly all the 1.5s that traded, and it's barely going to change because it's next year's paper," a sellsider said.

Shares of the Minneapolis-based medical device maker closed up 57 cents, or 1.3%, at $45.60.

Last week, Medtronic posted a statement on its website estimating that the annual cost of the excise tax on medical devices will cost it $150 million to $200 million annually, beginning in 2013.

"This is only 4% to 6% of its trailing 12 months adjusted income, and an even smaller percentage of consensus estimates for 2013," Carol Levenson, director of research at Gimme Credit, an independent research firm on corporate bonds, wrote in a note this week.

"The company noted that as the legislation evolved, the cost to the medical device industry fell from $60 billion to $20 billion over 10 years, while 'retail' products were excluded. Thus the size, timing, and distribution were 'tempered,' an impressive lobbying effort by the industry," Levenson wrote.

The company's estimate of the financial impact didn't include potential offsetting additional revenue from expanded insurance coverage, Levenson pointed out.

Gimme Credit's underlying view is "deteriorating." The company's finances were strained from its Kyphon acquisition, and the recall of its Sprint Fidelis defibrillation lead could be costly and leave the company with an additional litigation overhang. Meanwhile the company balances strong free cash flow and good liquidity with a fairly aggressive acquisition stance, Levenson wrote.

Mentioned in this article:

Corporate Office Properties Trust NYSE: OFC

Ford Motor Co. NYSE: F

King Pharmaceuticals Inc. NYSE: KG

Micron Technology Inc. NYSE: MU

Medtronic Inc. NYSE: MDT

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