SanDisk slightly higher in the gray; MannKind paper quiet on debut; Intel 2.95% bonds add

By Rebecca Melvin

New York, Aug. 19 - SanDisk Corp.'s planned $1 billion offering of seven-year convertibles was up a little in the gray market on Thursday ahead of pricing, which was expected after the market close.

Valuations of the new paper put it on average about 2% to 2.5% cheap, according to market sources, a valuation which wasn't viewed as particularly favorable given its seven-year term.

SanDisk's existing 1% convertibles were actively traded and higher Thursday.

MannKind Corp.'s newly priced 5.75% convertibles were quiet after being released for secondary market trading Thursday. The $100 million MannKind issue was priced concurrently with an upsized stock borrow facility of 9 million shares. But the limited borrow and limited access to the borrow meant the paper was still going to be illiquid, sources said.

Elsewhere, Intel Corp. saw its 2.95% convertibles trade up a point outright, in active trade, while Intel's tightly held 3.25% convertibles due 2039 remained quiet after news that the chip giant is buying software-security maker McAfee Inc. for $7.7 billion.

The acquisition news bolstered speculation that there might be other companies that might be takeover targets, and those takeover candidates were in focus, including Symantec Corp.

Stocks tumbled Thursday amid weaker economic readings. The Labor Department said claims for unemployment benefits rose unexpectedly last week, and the Federal Reserve of Philadelphia said manufacturing activity in the mid-Atlantic region has dropped during August.

Initial claims for unemployment benefits rose by 12,000 to 500,000 last week from an upwardly revised 488,000 a week earlier. Economists had forecast claims would fall slightly.

The fourth rise in the last five weeks meant that claims moved up to their highest level since November.

SanDisk somewhat cheap

The seven-year term of SanDisk's planned $1 billion of convertibles was pointed to as a detraction of the Milpitas, Calif.-based memory chip maker's deal.

"It's pretty long dated and I'd call it borderline, it's not super attractive from a profile perspective," a New York-based sellside analyst said.

SanDisk launched its offering of $1 billion of seven-year convertible notes after the market close Wednesday. The new paper was talked to yield 1.25% to 1.75% with an initial conversion premium of 22.5% to 27.5%.

In the gray market, it was seen at plus 0.25 point to 0.75 point and was last offered up 0.25 point, according to a New York-based trader.

Using a credit spread of 525 basis points over Libor and a vol. of 37.5%, one analyst said his firm was getting fair value of 102 bid, 102.5 offered at the midpoint of talk.

A second sellsider used 525 bps over Treasuries and a 40% vol., and the paper modeled 3.5% cheap.

The wider vol. would have accounted for the different valuation, especially given the seven-year term, a sellsider said.

A third source said: "Valuation of the deal in the middle of the talk is only mediocre - maybe 1.0% to 1.5% cheap. However, given its size, the dearth of new issues and the fact that SanDisk is very well known among convert players, this deal will easily get done. Maybe there is an outside chance the terms may be improved prior to pricing."

Two percent to 2.5% cheap for seven-year paper wasn't considered very cheap given that three-and five-year paper is trading about 2% cheap, a sellsider commented.

"The new ones are really long dated. I think they are trying to roll that maturity out. It's not big enough to cover the existing issue, because I don't think they would be using 100% of the proceeds for that. They had a pretty long list of uses. It's tough to say: it's not a vol. trade and the coupon is not big enough for a cash flow trade," the sellsider said.

"It models cheap enough to get the deal done. They're probably going to have to get some outrights involved to get the deal done," he said.

SanDisk's older paper better

SanDisk's existing 1% convertibles traded between 93 and 94.75 on Thursday and were last at 93.31.

One sellsider reported at trade of 93.75.

After initially rallying on the new deal news after the market close on Wednesday, the older paper looked about a point to 1.25 points better by the end of the session Thursday.

"It looks like from where they were trading pre deal, they were definitely higher by a couple of points initially," a trader said.

SanDisk plans to sell $1 billion of seven-year convertible senior notes after the market close Thursday.

Morgan Stanley & Co. Inc. and Goldman Sachs & Co. are the joint bookrunners of the offering.

SanDisk shares fell $2.83, or 6.3%, to $42.03 after the convertibles deal was launched.

Proceeds will be used for general corporate purposes, including repayment of a portion of its $1.15 billion of 1% convertibles issued in 2006; for capital expenditures for new and existing manufacturing facilities; for development of new technologies; and for general working capital and non-manufacturing capital expenditures; among other things.

MannKind quiet

MannKind's newly priced 5.75% convertibles were quiet Thursday on their debut probably due to the limited stock borrow.

MannKind issued an upsized 9 million shares of common stock at $5.55 per share. Originally the stock issue was going to be 8 million shares.

It's not anything that traders can trade, a sellsider said.

In addition, the story is a little sketchy given that the company doesn't yet have an approved product and proceeds of the deal are going to be used to fund trials.

"It's such a binary situation," an analyst said. If the company gets approval for its drug - there's a date in December when there should be some news - then there's a good chance that the convertibles would just get called because the stock would likely double and there is an immediate 150% soft call on the paper. But if they don't get approval, the company will likely go bankrupt, the sellsider said.

MannKind priced $100 million of five-year convertible notes after the close of markets on Wednesday to yield 5.75% with an initial conversion premium of 22.5%.

Pricing came at the cheap end of talk for the coupon, which was 5.25% to 5.75%, and at the midpoint of talk for the initial conversion premium, which was 20% to 25%.

Shares of the Valencia, Calif.-based biopharmaceutical company edged lower by 3 cents, or a 0.5%, to $5.94 on Thursday.

Intel 2.95s edge up

Intel's 2.95% convertibles due 2035 were up about a point to 99 bid, 99.5 offered, sources said.

The Intel 3.25% convertibles due 2039 were not heard in trade, and that issue, the newer of the two convertibles, is tightly held, given that it's a sizable issue from an investment-grade company.

Intel shares fell 69 cents, or 3.5%, to $18.90 on Thursday.

Intel's acquisition price was a 60% premium over McAfee's closing share price Wednesday.

While the announced deal couldn't be considered a drop in the bucket for Intel, it's not so large as to be seen as presenting any problems for the cash cow that is Intel.

"Nothing happening," a sellsider commented on the Intel securities. "It has a lot of cash, and it's a high investment-grade credit, so we're not really expecting anything."

Mentioned in this article:

Intel Corp. Nasdaq: INTC

MannKind Corp. Nasdaq: MNKD

SanDisk Corp. Nasdaq: SNDK

Symantec Corp. Nasdaq: SYMC

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