New Microns slip below par in secondary market; Coinstar up on strong preliminary results

By Rebecca Melvin

New York, April 13 - Micron Technology Inc.'s newly priced 2.375% and 3.125% convertibles both slipped below par on their debuts in secondary market action Friday after the Boise, Idaho, maker of semiconductor devices priced $870 million of the new notes at the cheap end of coupon talk and beyond the cheap end of premium talk.

The existing Micron convertibles were also lower on a dollar-neutral, or hedged, basis.

"I don't think anyone was too happy with it; the new deal didn't do well and the old deals did even worse," a New York-based sellsider said.

To be fair, the broader markets - which were weak - didn't help the deal, and the Micron shares underlying the new notes spent the session in negative territory and closed down 2.6%.

During marketing on Thursday the new deal was in need of juicing up with the addition of a coupon make-whole feature, which guarantees holders receive all the coupons they would otherwise have received if the notes are called during a provisional call period, and price talk on the initial conversion premium was lowered by 2.5% for both issues.

Elsewhere on Friday, Coinstar Inc.'s 4% convertibles gained on an outright and hedged basis in active trade after the Bellevue, Wash.-based operator of coin-counting machines and video rental kiosks preannounced to a much better-than-expected upside.

But the underlying shares of Powerwave Technologies Inc. plunged 39% after the Santa Ana, Calif.-based designer and maker of wireless tower infrastructure preannounced to the downside.

Powerwave's 3.875% convertibles due 2027 fell 20 points outright to 34.625, according to Trace data.

Also active were the Intel Corp. 3.25% convertibles, Gilead Sciences Inc.'s D tranche convertibles and Central European Media Enterprises Ltd., and all of the underlying shares of those convertibles ended the day lower.

For the week, three new convertible bonds came to market totaling $1.21 billion in issuance, despite the generally quiet, post-holiday tone following the Easter holy day, and as Passover was observed.

New Micron tranches slip

Micron's newly priced 2.375% convertibles due 2032, or C notes, slipped to about 99 versus an underlying share price of $7.00 by midsession Friday and closed at 99.375 versus $7.00. Early on, the C notes were quoted at 100.25 versus the $7.00 share price.

Micron's newly priced 3.125% convertibles due 2032, or the D notes, slipped to 98.5 versus $7.00 per share, and closed at 98.125 versus the $7.00 stock price. Early on, the D notes were quoted at 99.375 versus the $7.00 stock price.

Micron shares closed down 18 cents, or 2.6%, at $6.96 in very heavy volume.

Some market players said that trading of the new convertibles was sluggish in thin volume, but others said there was a decent volume, but it was likely that the underwriters were doing a vast amount of the trading.

"It's the quietest $870 million in history," a Connecticut-based trader said.

There may be more trading in the coming week as hedged players may trade when the stock price moves higher.

Market sources suspected that most of the new deal went predominantly to hedged players, and the deal's performance depended on the stock price at which hedges were made, a New York-based sellsider said.

"If you priced off of Thursday's close of $7.14, and now the stock is down here at $6.96, your bonds are 'in' more than 2 points" the sellsider said.

Outright players, including European outright players, may have thought it was not priced attractively enough with the tranches' high premiums, and there is also a lot of existing Micron paper outstanding that may have weighed on it.

Hedged players were said to have preferred the A tranche with its shorter-dated put and higher coupon, and that issue was upsized, while the B tranche was downsized slightly.

The deal also appeared to have struggled a bit during marketing, and two changes were undertaken to make it more appealing to investors, a syndicate source said.

The coupon make whole was added for the provisionally callable periods of the life of the bonds, and the initial conversion premium of the two tranches was pulled lower from original talk by 2.5%.

The syndicate source noted that despite the two changes, the outcome of pricing for the bonds was about the same from the issuer's perspective, and he noted that the last time that a non-investment-grade bond with a nine-year duration had a premium of 40% was in 2004, when non-investment-grade Calpine issued convertibles carrying a 6% coupon and a 40% premium.

"It ended up, in the context in history, attractive from an issuer's perspective," the syndicate source said.

Pricing came at the cheap end of initial coupon talk, which was 1.875% to 2.375% for the C notes and 2.625% to 3.125% for the D notes, and beyond the cheap end of initial conversion premium talk, which was 37.5% to 42.5% for the C notes and 42.5% to 47.5% for the D notes.

There is a $70 million greenshoe for the C notes, which was upsized by $5 million, and a $60 million greenshoe for the D notes, which was downsized by $5 million.

The C notes are non-callable for four years and then provisionally callable at 130% of conversion for three years before becoming freely callable. There is an investor put after seven years on May 1, 2019 for the C notes.

The D notes are non-callable for five years and then provisionally callable for four years at 130% of conversion, before becoming freely callable. There is an investor put for the D notes after nine years on May 1, 2021.

The notes have a coupon make whole provision during the period that the tranches are provisionally callable.

Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC were the joint bookrunners of the deal.

Micron made capped call transactions with various counterparties in conjunction with the deal.

The capped call transactions for the C notes have a lower strike price of $9.80 with capped prices ranging from $14.26 to $15.69, which pushes the conversion premium from the issuer's perspective to 100% to 120%.

The capped call for the D notes have a lower strike price of $10.16 and capped prices ranging from $14.62 to $16.04, which pushes the conversion premium from the issuer's perspective to 105% to 125%.

Proceeds are earmarked for general corporate purposes, including working capital, capital expenditures, strategic acquisitions, joint ventures and other investments, to repay debt and to cover the cost of the capped-call transactions, which are estimated to be about $89 million.

Coinstar adds on hedge

Coinstar 4% convertibles due 2014 traded at around 175 on Friday and had been around 168. At the close, some of the convertibles traded at 175 versus an underlying share price of $65.90. That was on a 90% delta and was up a point over Thursday's close, a New York-based sellsider said.

A second source said that on an 85% delta, the paper was up about a point on a dollar-neutral basis.

The points of premium over parity came in just slightly to 10.25 to 10.50 points from 10.75 points.

Coinstar shares jumped $4.47, or 7.3%, to $65.78 in very active trade.

"They did well," a sellsider said.

Coinstar announced preliminary first-quarter results for the period ended March 31, including results that exceeded previous guidance.

Consolidated revenue for the first quarter was seen coming in between $567 million and $569.2 million the company said.

Income from continuing operations was seen coming in at $53 million to $54.3 million, and core adjusted EBITDA from continuing operations was seen coming in at $127.9 million to $130.1 million; while earnings per share were expected at $1.36 to $1.40.

Increased revenue was driven by stronger-than-anticipated consumer demand at Redbox, reflecting in part better-than-anticipated consumer acceptance of a price increase for Redbox DVD rentals; and higher-than-expected earnings reflected increased revenue and the positive returns on a number of titles, including Moneyball, Puss and Boots and 50/50, which received awards attention, as well as In Time, Abduction and Mr. Popper's Penguins.

Coinstar also raised guidance for full-year 2012. It now expects full-year consolidated revenue of between $2.16 billion and $2.28 billion; core adjusted EBITDA from continuing operations of between $465 million and $495 million; and earnings per share from continuing operations on a diluted basis of between $4.40 and $4.80.

Coinstar expects to report final results for the first quarter on April 26.

Mentioned in this article:

Central European Media Enterprises Inc. Nasdaq: CETV

Coinstar Inc. Nasdaq: CSTR

Gilead Sciences Inc. Nasdaq: GILD

Intel Corp. Nasdaq: INTC

Micron Technology Inc. NYSE: MU

Powerwave Technologies Inc. Nasdaq: PWAV

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