SanDisk extends hedged gain; Cemex adds outright after earnings; Lincare paper active

By Rebecca Melvin

New York, July 20 - Earnings news drove a good bit of trading action in the convertible bond market during this past week and on Friday.

SanDisk Corp.'s 1.5% convertibles extended a move higher on a dollar-neutral, or hedged, basis Friday after the Milpitas, Calif.-based flash memory maker reported sharply lower second-quarter profit that beat estimates.

For the week, the SanDisk 1.5% convertibles expanded about 2 points, with about 0.75 point of the hedged improvement notched on Friday, a New York-based trader said.

Cemex SAB de CV's convertibles were higher after the Monterrey, Mexico-based cement producer reported a smaller loss that was larger than expected, but operating profit was up and the company said it expects stronger U.S. sales going forward.

The Cemex bonds have been substantially stronger since the company announced refinancing plans at the end of June.

Lincare Holdings Inc.'s convertibles were active and higher after the Clearwater, Fla.-based at-home respiratory services provider said that the fundamental change provision on its convertibles kicks in Aug. 8 when the planned $4.6 billion takeover by Linde AG is expected to close.

For the week overall, convertibles put in a mixed performance with one trader noting that one of the most interesting features was strengthening in a number of distressed bonds, like bankrupt Eastman Kodak Co., Patriot Coal Corp. and AMR Corp.

"There were winners and losers, but the most surprising thing I saw all week was PCX and EK going back up," the trader said.

Looking ahead, more earnings of convertibles issuers are due out next week. On the radar screen of one trader is the earnings of RadioShack Corp. expected on Wednesday. The RadioShack bonds have been weaker of late and were down at about 93 on Friday. The bond trades outright, and earnings on Wednesday will either push them higher or lower, the trader said.

"For one-year paper, this thing is really wide," the trader said, referring to its 9.9% yield.

SanDisk jumps on earnings

SanDisk's longer-dated 1.5% convertibles due 2017 traded up to 108.375 bid, 108.875 offered versus an underlying share price of $39.00 on Friday, a West Coast-based trader said, up from 107 on Thursday and up from about par earlier in the week.

SanDisk shares surged as much as $5.37, or 15%, to $40.45 in early trading. They closed off their highs at $38.70, which was up $3.62, or 10.3%.

The longer-dated bonds moved from a 55% delta going into Friday to about a 65% delta, sources said.

For the week, the 1.5% bonds expanded about 2 points.

"They did well on the way up," the trader said.

The SanDisk 1% convertibles due 2013, which mature next May, were at 98.75 bid, 99.25 offered versus the same $39.00 share price.

The company saw much weaker sales and margins in the second quarter but guided for improvement in the second half.

Excluding one-time items, the company earned 21 cents a share, which was higher than the 18 cents per share that analysts were expecting.

SanDisk had warned in April that flash-chip production was outpacing demand, causing prices to fall. The company said demand for memory from corporate customers and international markets has now improved and is helping the industry rebound.

"We believe that strengthening industry fundamentals and our expanding portfolio of solutions will contribute to improving financial results in the second half of 2012," chief executive officer Sanjay Mehrotra said in a release.

The company, which sells USB flash drives and embedded memory for mobile phones, has a strong balance sheet with nearly $4 billion in net cash, so it is more or less guaranteed that the bonds will be redeemed.

A short squeeze may have contributed to the sharp stock move, one trader said.

"Guys have been short the stock, and there have always been takeout rumors, but on a make whole you would get crushed," the trader said.

A second trader said that a takeout is unlikely given the present board of directors. He noted that Samsung had tried to acquire the company for $26.00 per share in the summer 2008.

"They think that they have the wind at their back, and they are the leader in flash," the trader said.

Cemex gains

Cemex's 4.875% convertibles due 2015 traded up 3 points to 90 according to trace data.

The Cemex 3.25% convertibles due 2016 traded at 87.5.

Cemex shares gained 33 cents, or nearly 5%, to $7.11 on Friday.

Cemex reported a narrowed loss of $187 million for the most recent quarter, down from a $209 million loss a year earlier. But analysts expected a loss of $75 million.

Cemex now expects U.S. sales volumes to increase in the high single-digit percentage range this year, compared with a previous outlook of growth in the mid-single digits.

A convertibles player said that the Cemex convertibles are essentially "a refi game," noting that since its refinancing plan announced at the end of June, the convertibles have been doing better.

During the quarter, the company reduced its debt, including perpetual notes, by more than $500 million, to $17.64 billion.

Lincare stronger

Lincare Holdings' 2.75% series A convertibles due 2037 traded at 155.4 on Friday, which was higher by about 0.7 point as shares remained little changed. That compared to 153.5 versus an underlying share price of $41.34, shortly after its deal with Germany's Linde was announced.

The Lincare 2.75% series B convertibles due 2037 traded at 172.25, which was up 0.85 point on the day and compared to 169.25 versus the $41.34 when the deal was announced.

On Friday, the Lincare shares were up 4 cents at $41.38.

Lincare anticipates that the fundamental change will occur on or after Aug. 8 under the terms of its series A and series B 2.75% convertible senior debentures due 2037 following its merger with Linde.

The merger agreement involves Lincare, Linde and Linde US Inc., a newly formed Delaware corporation and an indirect wholly owned subsidiary of Linde. Linde US began a tender offer for all Lincare share at $41.40 apiece on July 11.

The offer will expire at midnight ET on Aug. 7.

Holders will have the right to convert their securities at any time within 30 day after the effective date.

Any and all conversions will be settled in cash, according to a news release.

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

Cemex SAB de CV NYSE: CX

Eastman Kodak Co. Pink Sheets: EKDKQ

Lincare Holdings Inc. Nasdaq: LNCR

Patriot Coal Corp. Pink Sheets: PCXCQ

SanDisk Corp. Nasdaq: SNDK

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