SanDisk gains on speculation; Gilead improves ahead of results; Archstone-Smith plans overnight deal

By Kenneth Lim

Boston, July 10 - The convertible market started the week slowly, but activity could pick up as second-quarter results begin to arrive, market sources said.

Speculation about SanDisk Corp.'s earnings and concern about a new kind of memory chip sent the flash memory card maker's stock on a slide, but the convertible held and improved slightly.

Gilead Sciences Inc.'s were also a little better ahead of the company's results scheduled in the coming week.

In the primary market, the Archstone-Smith Trust launched an overnight $500 million offering of 30-year exchangeable senior notes with pricing slated for Tuesday before the market opens.

Meanwhile, volatility in the equity markets may have ended its three-year decline, heralding returns back to the convertible arbitrage strategy, said Paul Berkman, who becomes senior vice president for equity and convertible research at investment bank J Giordano Securities Group this week. But investors still need to be cautious with credit spreads threatening to begin widening again, Berkman said.

For now, the convertible bond market had a dull start to the week on Monday.

"It's pretty slow, people are still on vacation, I guess," a buyside convertible bond trader said.

A sellsider said the market could get going again soon.

"There are going to be pre-announcements, then earnings, it'll probably pick up then," the sellsider said.

Tech stocks were weaker on an outright basis on the backs of warnings from EMC Corp. on Monday and from Advanced Micro Devices Inc. the week before. Chip maker Intel Corp.'s 2.95% convertible due 2035 was marked at 83 bid, 83.25 offered against a stock price of $18.56 at the start of Monday, but traded lower for the rest of the day. Shares of Santa Clara, Calif.-based Intel (Nasdaq: INTC) closed at $18.18, down by 2.05% or 38 cents.

SanDisk gains dollar-neutral on rumors

SanDisk stock took a beating on Monday on a number of rumors about the company's results and competition, but the convertible withstood the onslaught and ended better on a dollar-neutral basis.

The company's 1% convertible due 2013 was 83.5 bid, 83.75 offered against a stock price of $43.65 on Monday, up about a quarter point to 0.375 point on a dollar-neutral basis. SanDisk stock (Nasdaq: SNDK) fell 8.2% or $3.89 to close at $43.56.

"Those were pretty active today," a sellside convertible bond trader said.

Rumors were cited for dragging down the stock, but market observers did not seem to put much weight on any of the speculation.

"There were rumors that they were going to preannounce, or that they had preannounced," a buysider said, "But I didn't see anything there."

A sellside analyst said there was talk that a new memory chip by Freescale Semiconductor Inc. could eat into demand for SanDisk's flash memory cards, but the analyst dismissed the concerns as unfounded for now.

"It's too early to make those conclusions," the analyst said.

Freescale said Monday that it has started to produce on a commercial scale a type of memory chip that uses MRAM, or magnetoresistive random-access memory. MRAM can store data without power like flash memory, but is faster and does not degrade over time. But Freescale's current MRAM chip currently stores only 4 megabits, far less than a flash memory chip.

SanDisk is based in Sunnyvale, Calif.

Gilead improves before results

Gilead Sciences saw its newest convertibles gain slightly on Monday ahead of its results announcement scheduled the next week.

The company's 0.5% convertible due 2011 was trading at around 98.25 against a stock price of $61.27, while the 0.625% convertible due 2013 was quoted around 98 versus the same stock price. Gilead Sciences stock (Nasdaq: GILD) closed at $61.60, up by 1.38% or 84 cents.

"They're doing a little better," a buyside convertible trader said.

Gilead Sciences has scheduled an earnings conference call for July 20. The stock has gained 4.5% in the past two weeks after RBC Capital Market's equity analyst Jason Kantor raised his earnings estimate for the company.

Gilead Sciences is a Foster City, Calif.-based biopharmaceutical company.

Archstone-Smith plans overnight deal

The Archstone-Smith Trust plans to price before the market opens on Tuesday $500 million of 30-year exchangeable senior notes, with the reoffer range at 99.25 to 99.75 against a coupon of 4% and an initial conversion premium of 22%, syndicate sources confirmed.

The notes may be exchanged for Archstone-Smith's common stock, but are issued by subsidiary Archstone-Smith Operating Trust.

The over-allotment option in the overnight deal is for a further $75 million.

Citigroup and Morgan Stanley are the bookrunners of the registered off-the-shelf offering.

The proceeds of the deal will be used to repay part of its debt under two unsecured revolving loans and two secured loans. Any remainder will be used for additional investments and general corporate purposes. Archstone-Smith is an Englewood, Colo.-based real estate investment trust with a portfolio of apartment communities run under the Archstone and Charles E. Smith brands.

Archstone-Smith stock (NYSE: ASN) closed at $52.14 on Monday, up 0.64% or 33 cents, before the deal was announced.

Time to be choosy, Berkman says

Convertible bond investors need to be selective as the prospect of widening credit spreads put a damper on improving volatility, said Paul Berkman, the newly hired senior vice-president of equity and convertible research at J Giordano Securities Group.

"There's reason to be hopeful, but there's also reason to be cautious," Berkman said.

Berkman joins J Giordano this week, becoming the second senior analyst at the investment bank performing convertible research, J Giordano research director Rick Nelson said.

The convertible veteran, who ran a convertible hedge fund management firm from 1992 to 2005, said volatility in the equity markets started a steady decline around the end of 2002 and continued until only recently.

"That's like a worst case scenario for a hedge fund convertible manager," Berkman said.

The drop in volatility may have stopped, with rising interest rates, high energy prices, inflation and other factors combining to occasionally spur market activity, Berkman said.

But the relief from a pick up in volatility may not reach everyone equally, Berkman noted. Credit spreads, which have also been contracting, could start to widen again.

"It's going to be good for some converts, bad for some converts," Berkman said.

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