SanDisk slides outright, adds on hedge; Chesapeake flat to lower; AMR adds on merger talk

By Rebecca Melvin

New York, April 20 - SanDisk Corp. was a top volume name in the convertible bond market on Friday, as the bonds dipped on an outright basis, but expanded on a dollar-neutral, or hedged, basis, traders said, after the Milpitas, Calif.-based flash memory chip maker reported weak first-quarter earnings and warned oversupply will hurt chip prices in the second quarter.

Price action in Chesapeake Energy Corp.'s two actively traded convertible issues was at the middle to lower end of their previous ranges as the underlying shares of the Oklahoma City-based natural gas company resumed a slide amid negative headlines stemming from word earlier this week that chief executive Aubrey McClendon borrowed as much as $1.1 billion over the last three years against his stake in company wells.

AMR Corp.'s convertibles traded a bit higher, up at 49.50, which was higher by 2 points, after U.S. Airways Group Inc. said it has struck deals with three of American's largest labor groups regarding a potential merger.

Currently bankrupt American has the exclusive right to develop a reorganization plan through September, and the carrier has said it wants to exit bankruptcy before considering a merger. US Airways, however, is seeking to gain momentum to bring a transaction to fruition sooner rather than later.

Cemex SAB de CV was also actively traded on Friday and flat to lower by 0.25 point on a dollar-neutral basis, a Connecticut-based trader said.

For the week, action in the convertible bond market was mixed, with some pronounced casualties like that of Human Genome Sciences Inc.'s 3% convertible bonds, which jumped outright, but came in by as much as 10 points on a dollar-neutral basis on Thursday after shares of the Rockville, Md.-based biopharmaceutical company soared on the company's rejection of a $2.59 billion GlaxoSmithKline bid.

Three new deals launched and priced in the convertible bond market in the past week, which was on par with three new issues that launched and priced the previous week.

This week's tally was slightly more than $800 million in new paper, compared to $1 billion plus of new paper the week before. Micron Technology Inc.'s dual-tranche deal totaling $870 million boosted the issuance tally last week.

Issuance was viewed as a key ingredient to the convertible market's performance for the week.

"I don't even know where Gilead Sciences Inc. and Symantec Corp. are," a New York-based trader said. "It's the new issues: if that group improved then probably it was a good week on balance."

The three new issues - Wabash National Corp.'s $150 million of new 3.375% convertibles, Titan Machinery Inc.'s upsized $135 million of new 3.75% convertibles and Tibco Software Inc.'s upsized $525 million of new 2.25% convertibles - all rose on an outright and hedged basis in secondary dealings.

SanDisk expands some on hedge

SanDisk's 1.5% convertibles due 2017 traded at 101.5 versus an underlying share price of $35.50 during the session, which was down about 10 points on an outright basis from previous levels. But on a dollar-neutral basis, the bonds expanded around 0.25 point to 0.375 point, a trader said.

Earlier this month, these bonds fell to around 112 versus an underlying share price of $44.51 when the company preannounced that results would be lower than initially forecast and lower than analysts' expectations.

The SanDisk 1.5s were the highest volume trader today on a weak quarter and guidance," a Midwestern-based trader said.

SanDisk said first-quarter profit sank by almost half amid weak demand and low selling prices, which are expected to continue to hamper results in the current quarter.

Net income for the quarter ended April 1 was $114.4 million, or 46 cents per share, down from $224.1 million, or 92 cents per share, a year earlier.

Excluding one-time items, SanDisk earned 63 cents per share, down from $1.03 per share in the year-earlier period.

That was lower than the adjusted earnings of 67 cents per share that analysts were expecting.

Revenue fell 7% to $1.21 billion, which matched expectations.

Demand was seen rising in the second half, and SanDisk projected second-quarter revenue of $950 million to $1.05 billion, which was below analyst expectations of $1.30 billion.

Robert W. Baird & Co. cut its price target on the underlying shares of SanDisk to $48.00 from $60.00.

SanDisk shares on Friday fell $4.56, or 12%, to $35.91 in heavy volume.

Chesapeake flat to lower

Chesapeake's 2.5% convertibles due 2037 traded at 83.75 bid, 84 offered on Friday, which compared to 83.625 bid, 84.5 offered late Thursday, a trader said, and those bonds were down about 2.5 points from Tuesday's level of 86 bid, 86.5 offered.

Chesapeake's 2.75% convertibles traded between 90.5 bid, 91 offered, with most prints done at 90.5, which compared to 90.1875 bid, 91 offered late Thursday

The bonds were trading at the middle to lower end of the previous range.

Shares of the Oklahoma City-based natural gas company fell another 56 cents, or 3%, on Friday to $17.44, closing near their lows of the day, amid news of a new shareholder lawsuit over potential conflicts of interest and an analyst's call for the chief executive and the board of directors to resign.

Since Tuesday's close, the Chesapeake shares have lost 8.8%. The shares fell sharply Wednesday on a Reuters report that McClendon has borrowed $1.1 billion against his oil well interests.

Oil analyst Phil Weiss with Argus Research said in a note Friday that it was in the best interest for McClendon, the board of directors, or both to step down.

AMR adds on merger talks

AMR's 6.25% convertibles due 2014 traded at 49.50, which was up 2 points on the day.

The increase was fueled by word that US Airways has gotten agreement from three of AMR's nine unions for a tentative deal based on term sheets for collective bargaining agreements.

The unions said they supported the transaction because they believe it would preserve jobs.

AMR wants to cut 13,000 union jobs, or about 15% of its work force, as part of a plan to save $1.25 billion in labor costs annually.

Mentioned in this article:

AMR Corp. NYSE: AMR

Cemex SAB de CV NYSE: CX

Chesapeake Energy Corp. NYSE: CHK

Human Genome Sciences Inc. Nasdaq: HGSI

Micron Technology Inc. NYSE: MU

SanDisk Corp. Nasdaq: SNDK

Tibco Software Inc. Nasdaq: TIBX

Titan Machinery Inc. Nasdaq: TITN

Wabash National Corp. NYSE: WNC

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