SanDisk up on swap after lowered guidance; Southwestern Energy launches $1.3 billion deal

By Rebecca Melvin

New York, Jan. 12 – SanDisk Corp.’s convertible bonds fell on an outright basis along with a 14% slide in the underlying shares, but they were significantly better on a dollar-neutral, or hedged, basis on Monday after the Milpitas, Calif.-based data storage company lowered revenue guidance for the just-completed quarter.

The two SanDisk bonds were the two most actively traded issues of the day, according to Trace data.

Elsewhere, convertibles were trading quietly as the energy sector led equities lower amid further deterioration in oil prices, and Southwestern Energy Co. launched a $1.3 billion offering of mandatory convertible preferred shares ahead of the market open for pricing Wednesday.

“It was probably a hard sell” to launch the deal from Southwestern Energy, a Houston-based oil and gas exploration and development company, into the market, a New York-based trader said. But further comments on the deal were not forthcoming as market players were not yet focused on the deal, which wasn’t expected to price until Wednesday.

Also in the primary market, Aegean Marine Petroleum Network Inc. launched a $40 million add-on to its 4% convertible bond issue due 2018. The deal, expected to price ahead of the market open on Tuesday, was talked at an offer price of 111 to 113. The new notes will have the same terms as the initial notes, other than the issue date and public offering pricing.

Despite the ongoing slide in oil prices, energy-related convertible names in the secondary market were not trading significantly, sources said. West Texas Intermediate crude for February delivery slid another $2.40, or 5%, to $46.96 on Monday.

Brocade Communications Systems Inc.’s 1.375% convertibles, which debuted in secondary market trading on Friday, looked a little stronger again on Monday, trading into the offering side of previous levels.

The San Jose, Calif.-based storage area networking company priced $500 million of the five-year notes at the rich end of talked terms late Thursday.

Also Qihoo 360 Technology Co. Ltd.’s bonds were trading OK against shares that were a little weaker. The short-dated Qihoo 2.5% convertibles were trading at 96, and the Qihoo 0.5% convertibles due 2020, or the A tranche, were trading at 88 to 89. Qihoo shares were off 94 cents, or 1.6%, at $56.85.

After the market close Alcoa Inc. kicked off the new earnings season, reporting a better-than-expected quarterly profit excluding restructuring costs as the New York-based aluminum company continues its transition toward higher margin automotive and aerospace products and away from high-cost smelting facilities.

Alcoa reported net profit of $159 million, compared to a loss of $2.3 billion in the year-earlier period. Excluding one-time costs, Alcoa reported net profit of $432 million, and earnings per share of 33 cents. Analysts had expected earnings of 27 cents per share for the quarter.

Alcoa has a 5.375% mandatory convertible preferred that may react to the earnings on Tuesday, a New York-based trader said.

SanDisk adds on swap

SanDisk’s 0.5% convertibles due 2020 were quoted at 113 bid, 113.5 offered with the underlying shares at $86.75 earlier in the day. That was higher by 1.5 points on a hedged basis, a New York-based trader said.

Later the SanDisk 0.5% convertibles were see at about 111 with the underlying shares at about $83.00. They expanded about 0.75 point more.

SanDisk’s 1.5% convertibles due 2017 were quoted at 171.625 bid, 172.125 offered with the underlying shares at about $86.75. That was up 0.5 point on a dollar-neutral basis. Later the 1.5% convertibles expanded a further 0.25 point.

“The stock got crushed, and the premium expanded, so the convertibles did what they were supposed to do; they were significantly better,” a New York-based source said.

The SanDisk shares fell 14% to $83.57 after the company said that it estimates revenue will be about $1.73 billion, which is lower than the previously forecasted range of $1.80 billion to $1.85 billion.

The lower revenue was primarily due to weaker-than-expected shares of retail and iNAND products. Non-GAAP gross margin for the fourth fiscal quarter was expected to be about 45% compared to the previously guided range of 47% to 49%.

SanDisk will publish its fourth-quarter financial results on Jan. 21.

Southwestern Energy to price

Southwestern Energy plans to price $1.3 billion of mandatory convertible preferred shares that were talked to yield 5.75% to 6.25% with an initial conversion premium of 17.5% to 22.5%. The deal for 26 million preferred shares at $5.00 per share is being priced concurrently with an offering of common stock for about $500 million.

The mandatory and common stock offerings are not contingent upon one another.

Proceeds will be used to repay borrowings under the company’s $4.5 billion bridge term loan facility associated with its Chesapeake acquisition.

Joint bookrunners of the series B mandatory convertibles are BofA Merrill Lynch, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Wells Fargo Securities LLC and BNP Paribas.

The series B preferreds are expected to be listed on the New York Stock Exchange under the symbol “SWNC.”

Aegean Marine to price add-on

Aegean Marine, an Athens-based marine fuel logistics company, plans to price $40 million of new notes in an add-on to its existing issue of 4% convertibles due 2018. The offering price was talked at 111 to 113.

The registered deal has a $6 million greenshoe and was being sold by bookrunner Jefferies LLC.

The initial conversion price will be about $14.23.

The notes are non-callable until Nov. 1, 2016 and then are provisionally callable if shares exceed 140% of the conversion price. If the notes are called, the conversion rate for holders who convert may be increased.

There is takeover protection and dividend protection via conversion rate adjustments for dividends above $0.01 per quarter. The notes have net share settlement and contingent conversion.

Proceeds will be used for general corporate purposes and working capital purposes.

Mentioned in this article:

Aegean Marine Petroleum Network Inc. NYSE: ANW

Alcoa Inc. NYSE: AA

Brocade Communications Systems Inc. Nasdaq: BRCD

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

SanDisk Corp. Nasdaq: SNDK

Southwestern Energy Co. NYSE: SWN

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