Micron Technology $500 million convertible talked at 2.75%-3.25%, up 35%-40%

By Ronda Fears

Nashville, Jan. 29 - Micron Technology Inc. launched a quick-sale convertible Wednesday, returning to tap into the paper-starved market with a $500 million bond talked to yield 2.75% to 3.25% with a 35% to 40% initial conversion premium.

The Rule 144A deal was pricing after the close, via joint lead managers Goldman Sachs & Co. and Lehman Brothers. There is a $75 million greenshoe. The seven-year subordinated notes will be non-callable for three years.

Sellside analysts put the deal anywhere from 1.7% to 7.29% cheap. The disparity mainly comes from varying views on the credit.

It was quoted in the gray market at the end of the day at 2.5 points bid, 2.75 points offered over par.

Credit default swaps on Micron five-year paper were described as "all over the board today," ranging from 600 basis points over Libor on the bid side to 800 basis points over Libor on the offer side, but with only a few trades.

Micron shares ended up 48c to $8.42.

"One theory on this [Micron's stock gain] I have heard from a buyside source, beyond the market's positive stance on a cash infusion to the company, is that this deal has been rumored in the market place for a few weeks, but the actual size of the deal was rumored to be in the $700 million to $1 billion area," said Matt Hempel, convertible analyst at Bear Stearns & Co.

"If accounts were setting up their hedge previous to the deal being announced, they may have been too heavy based on the actual deal size, leading to some short covering."

Micron's name has been bandied around in the convert market since shortly after the New Year began, as some deals out of the tech sector were anticipated.

With the outlook for chips still a matter of debate amid waning hopes for broad economic recovery, sources said the lack of supply in convertibles was the best thing going for the Micron deal.

"I think it's a joke," said a convertible trader at a hedge fund in New Jersey.

"I looked at it, got a chuckle and tossed it."

Views on the credit and skepticism about the turnaround for chips steered many risk-averse investors away but there were plenty of buyers placing orders.

"It's going great," said a salesman working on the deal, suggesting the deal might even get upsized.

"Of course buyers would like for it to be cheaper but if the stock is at a trough like some analysts say, then now's the time to get in. If the stock doesn't take off for a while, there's lots of downside protection" in the premium.

Wachovia Securities, Inc. convertible analyst Kimberlee Brody put the deal 4.05% cheap using a spread of 645 basis points over Treasuries, based on the credit default swap market at 600 basis points bid, 650 basis points offered, and 60% volatility.

Brody noted in a report on the new deal, though, that Wachovia convertible analyst Henry Voskoboynik believes a spread of 525 basis points over Treasuries is more appropriate, which would put it 7.29% cheap.

"With $4.8 billion in PP&E, you get good coverage on liquidation basis. There is not much debt ahead of you," Voskoboynik said.

"The company's total debt, including off balance sheet operating leases, is approximately $680 million [not counting the new convert]. You will only need $0.25 on the dollar in liquidation to make whole on your convert. I think it is a very good protection."

In the event Micron went bust, he said, Micron might get a U.S. government bailout like its top Korean competitors.

"In addition, I expect Micron's credit profile to improve in nine months as the company regains some of the lost market share," Voskoboynik said.

Taking an opposite view, Deutsche Bank Securities Inc. equity analyst Ben Lynch on Wednesday widened his forecast for a 2003 loss at Micron Technology to $2.25 per share from $1.53, citing lowered DRAM contract price expectations for 2003.

"The market remains negative on MU due to its loss of competitive edge in 2002, the likely continuation of DRAM price declines and heightened balance sheet concerns," Lynch said in a report.

Deutsche convertible analysts put the Micron deal 2.6% cheap at the midpoint of guidance, using a credit spread of 650 basis points over Libor and 65% volatility in the stock.

"We were pretty aggressive with the spread," said Jeremy Howard, head of U.S. convertible research at Deutsche, saying the credit default swap spread of 700 basis points bid, 800 basis points offered might be considered appropriate.

"We're very negative on the sector, fundamentally."

In a report on the new deal, Deutsche convertible analysts noted that while the convert is good news for Micron's balance sheet by increasing cash and flexibility, DRAMs will continue to burn money and a turnaround is not expected before the second half of this year.

Bear Stearns convertible analysts put the deal 1.7% cheap, using a credit spread of 650 basis points over Treasuries and 55% volatility.

"Getting the deal done improves the company's short-term funding needs and covers capex needs for the near future, so we would be closer to the aggressive end" of the credit spread ranges for Micron, Bear's Hempel said.

Merrill Lynch & Co. convertible analyst Tatyana Hube put it 4.67% cheap, using a spread of 730 basis points over Treasuries and 60% volatility.

S&P rated the new deal at B-, noting volatile operating performance in the depressed chip industry.

The Boise, Idaho-based memory chipmaker said it will use about $80 million of proceeds to enter into call spread options on its common stock to limit the potential dilution from the offering to existing shareholders.

Remaining proceeds will be used for general corporate purposes, including working capital, capital expenditures and research and development, and to further facilitate transitions to new product and process technologies, including its 0.11 micron line width process technology and processing of 300 millimeter wafers.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.