AMD steady, ChipPAC down; France Telecom jumbo rises; Deutsche Telekom adds 1 point

By Ronda Fears

Nashville, Sept. 2 - Advanced Micro Devices Inc. held steady Thursday in advance of Intel Corp.'s mid-quarter update after the closing bell, and though the Intel news was no surprise, traders said the weak outlook from the chipmaker sent AMD shares lower in after-hours trading.

"The bad news from Intel was no surprise, but it cast doubt on some of the other data," one sellside trader said, referring to an industry association report Thursday predicting that semiconductor sales for 2004 would see a gain of 28%.

"There are some people that will bail out on this news, but we're seeing some smart money step up for some of the beaten down issues. AMD, Fairchild, a lot of other chipmakers are doing fine, it is looking more and more like this is a problem for Intel."

That helped AMD remain steady. But, the trader pointed out that anxiety about the Asian markets caused some heavy selling in issues from that region, such as Stats ChipPAC Ltd.

Elsewhere abroad, France Telecom SA sold a jumbo €1 billion convertible to yield 1.6%, up 35.5%, and the French government sold another big equity stake in a concurrent offering, cutting its interest to around 43%, for €5.1 billion, with proceeds earmarked to reduce debt.

The deal prompted considerable activity in other European telecoms, particularly state-owned ones like Deutsche Telekom AG, that might follow suit. In fact, Deutsche Telekom is widely anticipated to make a similar transaction, including a possible convertible, soon. Generally, too, European convertible issuance is seen on the rise.

Chips mixed ahead of Intel

The Intel news was not good but was no real surprise, and while there was some degree of selling, traders said there also was a considerable amount of bottom-fishing going on as most of the chip names and equipment makers have tumbled sharply this summer as analysts severely cut back their outlook on the semiconductor industry.

Ahead of the news, AMD - Intel's biggest competitor - was steady to slightly lower with the stock off 3 cents, or 0.26%, to $11.67 and its 4.75% convertible steady at 94.5 bid, 95 offered. After hours, the stock was down almost 3%, but a sellside trader said there were better bids on the convertible.

Indeed, after the bell, Intel lowered its third-quarter projections, saying it now expects sales between $8.3 billion and $8.6 billion compared with an earlier range of $8.6 billion to $9.2 billion. Intel slashed its gross margin target for the quarter to 58% from 60% previously and cut its full-year gross margin target to a range of 58% to 60% from an already reduced goal of around 60%.

Because of widely anticipated bad news from Intel, the sellside trader said there was increasing anxiety about chipmakers in Asia, particularly Stats ChipPAC.

"ChipPAC has been seesawing all week ahead of the Intel news, lots of positioning going on, stuff like short covering, then selling short. It's been pretty erratic," said a convertible trader. "Today it was all that, too. The stock started to run and some more negative news in semis came out, but we thought the Intel news was already factored in. A lot of it is anxiety about the Asian markets; no one has a real grasp on that."

The Stats ChipPAC 2.5% convertible due 2008 fell 2.5 points, he said, to 100 bid, 100.5 offered with the stock down 22 cents, or 3.36%, to $6.33.

The sellside trader said, too, there was selling in the STMicroelectronics NV and ASML Holding NV converts.

Elsewhere in chip-related news, the Semiconductor Industry Association reported that semiconductor sales in July rose 38% from a year ago, and the group reiterated prior expectations of a sequential 4% to 6% rise in third-quarter sales. The industry tracker also said it still sees sales growth of 28% for the year.

France Telecom issue edges up

France Telecom's new convertible was very active, traders in London said, but edged up only slightly in price and actually cheapened a bit in terms of implied volatility. Several other European telecom issues were active, too.

The new France Telecom 1.6% convertible was quoted at the close of the London markets at 2,583 bid, 2,585 offered, versus a par of 2,581. The underlying stock, on huge volume, rose €0.32, or 1.68%, to €19.40 on the Paris exchange.

Final terms on the new issue was perceived as relatively rich at an implied volatility of 26.9% versus the historical 100-day vol of 21.9 and 260-day vol of 25.8, said a market source in London, so despite the upward move in the shares the convertible was flat on the day and actually cheapened to an implied vol of 25.8%.

In addition to the convertible sale, the French government sold as much as a 12% stake in a concurrent stock sale, cutting its interest to around 43%, for some €5.1 billion, with proceeds earmarked to reduce debt.

Traders moving the new France Telecom convert said there were quite a few outright buyers but also some of the hedge funds bought outright, hoping to sell the hedge at a better price than the reference price of the concurrent equity offering. The stock, it was pointed out, priced at €19.05 - a 1.96% discount to the close on Tuesday and at a 4.22% discount to the close on Monday.

"Hedge funds were, in general, willing to pay up due to scarcity of supply and benefit of the low reference price on the share offering," a market source in London said.

Participants in the deal also liked the plan to reduce debt, a convertible trader in London said, so there also was very good two-way action in the France Telecom 4% euro convert due 2005, although he noted that the issue hovered around the par level as a redemption may be in the offing. The 4s closed at 100.5, he said.

DT mandatory gains 1 point

Other European telecoms, particularly state-owned concerns, were active as the market expects they will be keen on further equity offerings to reduce debt, he said.

Deutsche Telekom AG, which is 43% government-owned, is seen coming to market next, he said, and likely with an exchangeable bond. The Deutsche Telekom 6.5% euro mandatory due 2006 rose 1 point on Thursday to 112.25 bid, 113 offered, he said. The stock gained €0.18, or 1.27%, to €14.33 on the Xetra exchange amid strong volume.

Some credit analysts say, however, that it may be time to take profits in Deutsche Telekom.

"Although [Deutsche Telekom] credit profile has improved, the potential for acquisitions, the 60 basis point decline in operating margins in the second quarter, and a substantial debt load suggest that Deutsche Telekom should be trading well behind Verizon and SBC rather than in line as it currently does," said Gimme Credit bond analyst Dave Novosel.

Novosel recommended selling Deutsche Telekom paper at current spreads.

KPN NV, Colt Telecom Group plc, and Telecom Italia SpA were better bid but most were trading in a sideways pattern, the convertible trader in London said.

Analysts that look specifically at euro converts suggest that there could be further cheapening in those bonds, it should be noted, which could imply that selling now is a smart move.

Merrill Lynch convertible analysts in London said in a report Thursday that average European convertible implied volatility fell slightly in August to finish at 25.5% but is still above at-the-money implied volatility on the stock as well as historical volatility levels on the stock, which "leads us to consider that convertible valuations may have the potential to fall further."

Euro issuance seen improving

On the heels of France Telecom's jumbo issue, onlookers abroad say European convertible issuance, in general, should pick up soon, as well.

Barclays Capital head of convertible research Luke Olsen noted in a report Thursday that the cost of issuance in Europe declined significantly in August, dropping 20 basis points following a drop of 30 basis points in July. But the lower yield shouldn't affect demand, as he also noted a sharp lack of supply.

"The summer convertible issuance drought in Europe leads us to expect further issuance in the coming weeks," Olsen said, particularly noting the France Telecom deal.

Deal managers said there was high demand for the France Telecom issue, as the books were about three times oversubscribed, with allocations well balanced between outright and hedge fund participation as well as French and U.K. investors.

France Telecom sold €1 billion offering of convertible bonds due January 2009 in the Oceanes structure to yield 1.6% with a 35.5% initial conversion premium - at the middle of yield talk for a 1.35% to 1.85% coupon and at the more aggressive end of premium guidance of 32% to 37%. In deal materials, it also was noted that the France Telecom issue was extremely aggressively priced given the implied volatility level of 27.5%.

Olsen said the improved cost of issuance for issuers was driven mainly by tightening in five-year euro swap rates and, to a lesser degree, a slight rise in implied volatility and slight narrowing in euro BBB spreads.

"Overall, we think that conditions for issuance may deteriorate slightly over the next month, albeit from relatively favorable levels by historical standards, driven mainly by rising euro swap rates," Olsen said, noting that Barclays strategists expect five-year euro swap rates to widen by 18 basis points to 3.70% by the end of September.

But, he added, the "€1 billion France Telecom convertible reopened the primary market in Europe and we believe that other issuers may follow suit in the next few weeks, given the attractive pricing conditions and the ongoing supply/demand imbalance."

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