New Micron trades flat dollar neutral after lackluster debut; Horsehead adds with shares

By Rebecca Melvin

New York, July 22 - Micron Technology Inc.'s new 1.5% and 1.875% convertibles - which were a highlight of the past week - traded up outright on Friday in tandem with the underlying shares, but on a dollar-neutral, or hedged, basis, they remained down 0.5 point for the Micron 1.5% paper and down about a point for the 1.875% convertibles, as per their debut on Thursday.

The $600 million Micron issue of A and B tranches was priced aggressively and looked to be geared to outright players as opposed to hedged or swap players.

On Friday, Micron's shares were buoyed by strength in the semiconductor sector after positive earnings from the likes of SanDisk Corp. and Advanced Micro Devices Inc.

The convertibles of SanDisk and AMD were mostly higher in light of those equity gains.

Moving in the opposite direction was AMR Corp., which fell to the upper 80s from the low 90s in trade on Friday, representing a 1.25-point decline on a dollar-neutral basis, according to a New York-based sellside analyst.

AMR reported a second-quarter loss that was larger than expected, citing higher fuel prices, on Wednesday, and shares slid lower.

The Dallas-based carrier said Wednesday it lost $286 million, or 85 cents a share, which was more than the 75-cent loss that analysts had expected. Revenue rose 7.8% to $6.1 billion, in line with estimates.

In the convertibles primary market, which has improved in the last two weeks, Horsehead Holding Corp.'s newly priced 3.8% convertibles were quoted out of the gate on their debut in line with higher underlying shares. They were seen at 106.25 bid, 107.25 offered versus a share price of $11.7575 in the early going Friday.

The specialty zinc producer priced $80 million of six-year convertible senior notes at the cheap end of coupon talk, but the rich end of premium talk.

For the week, the convertibles market saw about $1 billion of new issuance in five deals. Last week a three-week drought in new issuance was snapped.

"It's good to see an uptick," a New York-based sellside trader said. "But we could use a lot more."

As for where the market is heading from here, Bank of America Merrill Lynch came out with its mid-year forecast, which was essentially unchanged from its initial 2011 forecast published last December.

The Bank of America Merrill Lynch convertibles analyst said that despite a year that has turned out to be extremely volatile so far, its initial predictions are intact.

Analysts Tatyana Hube and Alan Yu said that they are still forecasting convertible new issuance of about $35 billion to $45 billion for the full year. As for market returns, they see 10% to 11% return for outright players, or about 6% for the rest of the year, given their base-case scenario of stocks going up 13%; and their hedged return forecast is for a more muted 3.5% after fees and before hedging interest rates.

"A lack of sustainable volatility and monetizable cheapness continues to put a damper on the convertible hedge returns," Hube and Yu wrote in their report.

An analyst from a different firm said that most market players continue to have some "macro" concerns and are "walking very gingerly.

In particular the European debt crisis and the U.S. debt ceiling are weighing on sentiment.

"The next hurdle to overcome is the U.S. debt ceiling," the analyst said. "That is going to impact the rates market more than the convert market but depending how things move you could see a material uptick in rates, which could potentially translate into more convertible paper being issued."

A caveat of that view is how equities hold up in a scenario in which the debt ceiling is not increased.

Micron lower dollar neutral

The Micron 1.5% A tranche convertibles traded up to 103.75 versus the underlying shares being at $8.10 on Friday, according to one market source. And the market was later quoted 103.625 bid, 104.125 offered.

The Micron 1.875% B tranche convertibles traded up to 103 bid, 103.5 offered.

But even though that was a good 3.5 points higher outright compared to earlier Friday, the new Micron convertibles were still seen 0.5 point and 1 point to 1.5 point lower dollar neutral, respectively, and essentially unchanged from their trading debut on Thursday.

Earlier Friday, the A tranche traded at 100.25 and the B tranche traded at 99.5, versus an underlying share price of $7.65, which was about 0.25 point better from where they went out on Thursday.

Shares of the Boise, Idaho-based semiconductor device maker jumped 45 cents, or 6%, to $8.09 on Friday.

On Thursday, the Micron newly priced 1.5% A tranche convertibles due 2031 traded right around par, or at 100 versus an underlying share price of $7.60. The Micron 1.875% B tranche also due 2031 traded below par at 99.25.

"We had then fair value below par for the Bs and right around par for the As, and that's kind of how they have traded," a New York-based analyst said.

The underperformance is reflective of the fact that the bonds weren't priced for swap buyers but were priced for outright buyers, the analyst said.

"They had some big outright bids for the name, that's my guess, and they priced it as aggressively as possible for the benefit of the company," the analyst said.

The company has a lot of capital expenditure and leverage, making it a not stellar credit, although a mark in its favor is that the stock trades with a lot of volatility.

In addition, the structure was awkward with a mismatch in the call protection and long dated puts.

"People aren't thrilled with the structure in general, although the make whole helps," he said.

But for outright players it probably looks just fine. "You've got four years of coupon if you're outright, and that's 6 points right there," he said.

Horsehead moves up in line

Horsehead's newly priced 3.8% convertibles due 2017 were seen at 106.25 bid, 107.25 offered versus an underlying share price of $11.75.

Shares of the Pittsburgh-based producer of specialty zinc and zinc products bounced higher Friday, surging 79 cents, or 7%, to $11.88. Shares had plunged about that much on word of the new debt offering.

Horsehead priced $80 million of six-year convertible senior notes after the market close Thursday at par to yield 3.8% with an initial conversion premium of 35%.

The Rule 144A offering priced toward the cheap end of talk for the coupon, which was 3.375% to 3.875%, and toward the rich end of premium talk, which was 31% to 36%.

The offering has a $20 million greenshoe and was sold via bookrunner Stifel Nicolaus & Co. Inc., with co-managers Canaccord, Genuity Corp., KeyBanc Capital Markets LLC and PNC Capital Markets LLC.

The notes are non-callable for life and have no holder puts.

Proceeds will be used, together with cash on hand, for construction of a new zinc facility and for general corporate purposes, including working capital, investment in business initiatives, capital expenditures and acquisitions.

SanDisk, AMD in focus

SanDisk's 1.5% convertibles due 2017 traded during the session at 112.6, which was up 5.7 points on the day.

SanDisk's 1% convertibles due 2013 traded at about 97, which was up 0.25 point.

Shares of the Milpitas, Calif.-based maker of flash data storage products jumped $4.00, or 9.6%, to $45.57 in heavy volume.

"SanDisk is up 10%," a New York-based analyst said simply when asked on the company's convertibles.

SanDisk reported second-quarter net income, excluding some expenses, of $1.14 per share, which was much better than the 99 cents per share that analysts had been expecting. Revenue was $1.37 billion, which also exceeded estimates.

Guidance for the current quarter is for $1.38 billion, which is higher than the $1.34 billion analysts had expected.

AMD, which trades on a 0% delta, or completely outright, didn't see a lot of action Friday as shares of the Sunnyvale, Calif.-based chip maker surged $1.25, or 19%, to $7.75 in ultra-heavy volume.

AMD's 5.75% convertibles due 2012 have traded around 103 and were little changed Friday. But AMD's 6% convertibles due 2015 traded at 102.75 Friday, which were up from 101.25 bid, 101.5 offered seen on Thursday, a New York-based analyst said.

Mentioned in this article

Advanced Micro Devices Inc. NYSE: AMD

AMR Corp. NYSE: AMR

Horsehead Holding Corp. Nasdaq: ZINC

Micron Technology Inc. NYSE: MU

SanDisk Corp. Nasdaq: SNDK

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