AMD slumps after weak results, layoffs; Clearwire active; A123 above pre-bankruptcy levels

By Rebecca Melvin

New York, Oct. 19 - Advanced Micro Devices Inc.'s 6% convertibles due 2015 dropped about 6 points in a burst of activity Friday as the underlying stock slumped after the Sunnyvale, Calif.-based chipmaker reported weak fiscal third-quarter results that missed estimates and said it is cutting about 1,800 jobs, or 15% of its workforce, by the end of the year.

The AMD convertibles dropped from about par to 94.25, and then clawed back some, with trades as high as 97. But they were seen last at 94 bid, 95 offered, while shares plunged to multi-year lows.

A123 Systems Inc. jumped up Friday to above pre-bankruptcy levels as proceedings in the court case spur optimism about the value of the electric car battery maker's assets and potential higher bids for purchasing the company from others, including China's Wanxiang Group. The court also approved borrowing from stalking horse bidder Johnson Controls Inc.

Clearwire Corp.'s convertibles continued to bounce around in the mid to upper 90s after trading above par again on Thursday as uncertainty remained over how Softbank Corp.'s deal with Sprint Nextel Corp. will impact the Bellevue, Wash.-based wireless broadband services provider.

"It's definitely not clear at this point," a West Coast-based trader said of Clearwire.

Cemex SAB de CV was also an active trader in the last two sessions, with pricing of the two convertible bond issues of the Monterrey, Mexico-based cement maker seen moving essentially in line with the underlying shares, a New York-based trader said.

Teleflex Inc.'s convertibles were quoted at 123.375 versus an underlying share price of $67.50 on Friday, compared 124.875 versus $68.81on Thursday.

Teleflex equity sold off Thursday after weak quarterly results, and the convertibles looked to have moved down on a 65% delta, a New York-based trader said.

Meanwhile, Walter Investment Management Corp.'s 4.5% convertibles, which jumped on their debut in the secondary market on Thursday, traded a little lower in the 102 context, but also at 103, a New York-based trader said, which was steady compared to Thursday's close, but the underlying shares fell 2.75% on Friday.

The Tampa, Fla.-based mortgage services company priced an upsized secondary offering of stock and $265 million of the convertible notes, which came at the rich end of talk, late Wednesday.

This past week's only other primary market activity was ZaZa Energy Corp.'s $40 million of five-year convertible senior notes to yield 9% with an initial conversion premium of 32%, and that level of new issuance, just breaking $300 million, is the slowest weekly new issuance showing for the month so far.

Despite a broad selloff in equities, much of the focus in convertibles was on responses to developments in name-specific situations. On Friday, the Nasdaq Stock Market fell 67.25 points, or 2.2%, to 3,005.62, the Dow Jones industrial average dropped 205.43 points, or 1.5%, to 13.343.51, and the S&P 500 stock index was lower by 24.15 points, or 1.7%, at 1,433.19.

AMD slumps after earnings

AMD's 6% convertibles due 2015 traded down to 94.25 on Friday from about par, and later changed hands in the 94.25 to 97 range.

Near the end of the session, it was close to its lows of the day, a New York-based convertibles analyst said.

Share of the Sunnyvale, Calif.-based chipmaker slid and closed near its lows of the day as well, down 44 cents, or 17%, at $2.18.

"It started trading in line, and continued to grind lower with the stock," the analyst said, calling the last market 94 bid, 95 offered.

A weaker-than-expected quarterly loss and significant layoffs were behind the slump.

"Things have gone from bad to worse at Advanced Micro Devices," Gimme Credit analyst Dave Novosel wrote in a note published early Friday.

Third-quarter revenue sank 25%, and the weak sales led to an under-utilization of capacity, Novosel wrote.

"That along with a $100 million inventory write-down for Llano accelerated processor units and lower average selling prices resulted in gross margins decreasing more than 1,300 basis points to 31%, the analyst said.

The large operating loss led to negative free cash flow of $272 million.

The restructuring plan is expected to save $20 million in the fourth quarter and $190 million in 2013, Novosel said, and it "is clearly needed but is unlikely to offset the 32% plunge in revenue management is forecasting for the fourth quarter."

AMD management has said that it needs to move to other sources of revenue besides the PC market, given weaker sales in the face of rising consumer demand for tablets and smartphones and away from PCs.

Nevertheless, Novosel said that he expects near-term improvement given benefits from the cost advantage of new technologies. He warned however that AMD has not always executed successfully.

"Free cash flow is being directed to debt reduction, but leverage actually inched higher recently because of lower EBITDA generation," he noted.

A123 moves higher

A123 Systems' 3.75% convertible subordinated notes due 2016 jumped as much as 10 points on Friday to 48 and were seen last at about 42 bid, 44 offered, or 43 bid, 45 offered, market sources said.

"There was a stray piece at 48, and it's kind of wide at 42-48, but I think it will settle in at 43-45," a Connecticut-based trader said.

The convertibles were up from 36 bid, 37 offered on Thursday, and given that the bankruptcy was pretty widely expected, that is where the convertibles were trading even a month ago.

As for why the notes were looking stronger after the bankruptcy filing, one New York-based trader said, "People are seeing the documents and are getting a better understanding of the assets and liabilities."

Another convertibles player said that he thought the feeling was that recovery would be better with existing assets than if the company stayed out of bankruptcy and "just kept blowing through them."

A123 filed for bankruptcy protection from creditors after failing Monday to make a $2.8 million interest payment to convertible bondholders. The news initially sent the paper down to 25 from 30.

Later in the week, the notes were back up at about 36, and on Friday they climbed to the mid 40s, after a bankruptcy court judge approved borrowing from Johnson Controls and welcomed other bidders to the process including the Chinese company Wanxiang Group.

Wanxiang was negotiating an investment in A123 last summer, under which the Chinese company had looked to take an 80% stake in the battery developer.

Currently Johnson Controls is providing the company with $72.5 million in debtor-in-possession financing to fund the bankruptcy case.

On Thursday, a U.S. Bankruptcy Court judge granted A123 approval to borrow $15.5 million from Johnson Controls.

The interim financing was approved after Johnson Controls agreed to lower the interest rate on the loan to 13.5% from 15%.

Clearwire slips again

Clearwire's 8.25% convertibles due 2040 were seen at 96 bid, 98 offered on Friday, which was down from trades over par on Thursday.

The bonds have been wavering between the low 90s and 100 all week after rising from 74 last week.

Shares of the Bellevue, Wash.-based wireless broadband services provider moved down 18 cents, or 9%, to $1.85 on Friday.

"With Clearwire, I guess it's a question of whether certain cross-default or change-of-control language is actually triggered, which is being debated," a convertibles strategist said.

Japan's Softbank Corp. agreed to buy 70% of Sprint Nextel this week for about $20 billion. Sprint owns 49% of Clearwire, which owns U.S. spectrum and is planning a next-generation network using technology called TDD LTE.

Mentioned in this article

Advanced Micro Devices Inc. NYSE: AMD

A123 Systems Inc. Nasdaq: AONE

Cemex SAB de CV NYSE: ADS: CX

Clearwire Corp. Nasdaq: CLWR

Teleflex Inc. NYSE: TFX

Walter Investment Management Corp. NYSE: WAC

ZaZa Energy Corp. Nasdaq: ZAZA

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