SanDisk deal gains in gray market; Broadwing offering seen as fair; General Motors mixed on upgrade

By Kenneth Lim

Boston, May 9 - A trio of new deals kept the convertible bond market busy on Tuesday, but otherwise activity was muted, market sources say.

"It was exceptionally, exceptionally, exceptionally quiet," said a sell-side convertible bond trader.

SanDisk Corp.'s $1 billion offering of seven-year convertible bonds were up half a point in the gray market on Tuesday, and the deal was priced after the market closed within talk at a coupon of 1% and an initial conversion premium of 30%.

Broadwing Corp.'s $125 million of 20-year convertible senior unsecured debentures were offered one point above par in the gray market as market sources described price talk as reasonable. The company was guiding for a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%.

Earlier in the day, Qiagen NV's $270 million offering of 20-year convertible senior notes were priced overnight within talk at a coupon of 3.25% and an initial conversion premium of 30.89%. The deal was described as "attractive" by analysts at Barclays Capital.

General Motors Corp.'s convertible preferreds saw some action on Tuesday after the underlying stock received an analyst's upgrade, with the Detroit auto maker's longer-dated convertibles faring better than its short-dated convertible.

The General Motors 5.25% convertible due 2032 (NYSE: GBM) gained 0.42 point, or 2.5%, to close at 17.20 against a $25.80 stock price, while the 6.25% convertible due 2033 (NYSE: GPM) climbed 4.73% or 0.87 point to end at 19.25 against the same stock price. The shorter-dated 4.5% convertible due 2032 (NYSE: GXM), however, slid 0.04% or 0.01 point to close at 23.99. General Motors stock (NYSE: GM) closed at $25.80, up 9.55% or $2.25.

General Motors shares got a boost on Tuesday after Deutsche Bank equity analyst Rod Lache upgraded the stock to hold from sell, citing the liquidity that the company gained from its recent asset sales and its ability to moderate its spending in the next two years.

A sell-side convertible bond trader said the 4.25% preferreds did not do as well as the other two General Motors convertibles because they have a put approaching in 2007 and are already trading close to their $25 par.

"The GXMs are capped," the trader said. "You're talking about a 10-month piece of paper...there's significant headline risk to the name."

The longer-dated preferreds, meanwhile, are still trading at a significant discount to parity, and have more room on the upside if General Motors stock climbs.

"I would suggest that if anybody likes the GM name, the GBM is a much better place to put your money," the trader said.

Watson Pharmaceuticals Inc.'s 1.75% convertible due 2023 were about a half-point better bid on a dollar-neutral basis despite its stumbling stock after the biotech company reported lower first-quarter profits.

The convertible was seen at 90.25 bid, 91 offered against a stock price of $27.35, the trader said. Watson stock (NYSE: WPI) closed at $27.45 on Tuesday, down by 8.47% or $2.54.

"The WPIs traded a lot because they bummed out on earnings, but the bonds held up pretty well," the trader said.

Corona, Calif.-based Watson reported Tuesday a first-quarter profit of $25.2 million, or 23 cents per share, down about 35% from the $38.6 million, or 32 cents per share, profit from the year-ago period. Wall Street estimates were for a profit around 32 cents per share. But the company's stock climbed back 3.32%, or 91 cents, to $28.36 in after-hours trading after the company said it had received tentative approval from the Food and Drug Administration for its generic version of the birth control drug Seasonale.

Beyond the United States, Indonesia's PT Medco Medco Energi Internasional Tbk. launched a $170.8 million to $183 million offering of five-year, zero-coupon unsubordinated, unsecured convertible bonds talked to yield 6.7% to 7.375% with an initial conversion premium between 40% and 50%.

PT Medco will offer the bonds at par denominations of $100,000 through finance subsidiary Medco CB Finance BV and will guarantee the debt.

Credit Suisse and Deutsche Bank are the bookrunners of the Regulation S deal.

PT Medco (Jakarta: MEDC) is a Jakarta-based oil and gas company. It plans to use the proceeds of the deal to finance capital expenditures and for general corporate purposes.

In South Korea, semiconductor chip maker Hynix Semiconductor Inc. also announced plans to raise about $700 million from new stock and convertible bonds.

SanDisk deal up 0.5 point in the gray

SanDisk's $1 billion of 7-year convertible senior notes were seen trading about 0.5 point above parity in the gray market on Tuesday before the deal was priced within talk at a coupon of 1% and an initial conversion premium of 30%.

The convertibles, which were offered at par, were talked a coupon of 0.75% to 1.25% and an initial conversion premium of 27.5% to 32.5%.

There is a greenshoe option for a further $150 million.

Morgan Stanley and Goldman Sachs were the bookrunners of the registered off-the-shelf deal.

SanDisk stock (Nasdaq: SNDK) closed at $65.35 on Tuesday, down 2.09% or $1.35.

A convertible bond trader said he was cautious about the SanDisk deal because the low coupon provides very little downside protection while requires "a lot of assumptions on the stock."

"I just don't think the structure is going to work," the trader said.

The new convertibles will lock in investors for seven years, and in that time investors could be hurt if the stock tumbles, even if the equity is volatile, the trader said.

"It'll work fine on the upside, but not on the way down," the trader said. "It's the coupon, it's what doesn't protect you, a 1% coupon when rates are 5%."

A sell-side convertible bond analyst said the deal was about 2% to 2.25% cheap at the mid-point of talk on a credit spread of 170 basis points above Libor and a volatility of 43%.

The analyst said the 43% volatility was conservative, but it was appropriate because SanDisk volatility has historically been in the low 40s, even though the name has been more volatile recently.

And although the company has no debt, the spread comes out wider than it would for some other companies because SanDisk's business of making flash memory cards deals with a commodity product, the analyst said.

"It's a product with very low barriers to entry," the analyst said. "Standard and Poor's rates this thing BB- because of the volatile nature of this product."

SanDisk is a Sunnyvale, Calif.-based maker of flash storage cards used in consumer electronics. The proceeds of the offering will be used for general corporate purposes including capital expenditures. The proceeds may also pay for strategic investments and acquisitions, although SanDisk said it has no specific acquisition commitments at the moment. Part of the proceeds will also be used for the note hedging transactions.

Broadwing seen as reasonably priced

Broadwing's proposed $125 million of 20-year convertible senior unsecured debentures were seen as fair at the mid-point of price talk and offered one point above par in the gray market, market sources said.

The offering was talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%, and pricing was expected Tuesday after the market closed, market sources confirmed.

There is a greenshoe option for a further $25 million.

Jefferies & Co. is the bookrunner of the deal, which is offered in the United States under Rule 144A with registration rights and in other markets under Regulation S.

The trader who was cautious about the SanDisk offering said Broadwing's convertibles were much better structured and would appeal to a wide range of investors.

"I think that the market needs a hundred more deals like this," the trader said.

A syndicate source said the offering had received good response from outright and hedged investors.

A New York-based convertible analyst said the offering was about 2% cheap at the mid-point of talk. That was on a volatility capped at 45%.

The credit spread used was 300 bps over Libor, which takes into account that "the company has some decent sales numbers but it's still making a loss, and that concerns me," the analyst said.

Broadwing is an Austin, Texas-based provider of communication network services. The proceeds of the offering will be used for general corporate purposes, market sources said.

Broadwing stock (Nasdaq: BWN) closed at $13.28 on Tuesday, down by 5.41% or 76 cents.

Qiagen prices upsized $270 million deal within talk

Qiagen on Tuesday priced an upsized $270 million of 20-year convertible senior notes within talk for a coupon of 3.25% and an initial conversion premium of 30.89% as analysts from Barclays Capital described the deal as "attractive even on the worst terms."

The notes were talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 30% to 35%. The size of the deal was initially $220 million. An over-allotment option of $30 million remains.

Goldman Sachs is the bookrunner of the deal, which is distributed outside the United States under Regulation S.

The convertible was valued at 100.9 with a 66% delta and an implied volatility of 25.7% on the worst terms, said Barclays convertible analysts Heather Beattie, Haidje Rustau and Luke Olsen. On the best terms, the convertible was worth 106 with an implied volatility of 17.9% and a 68% delta, the analysts said.

"Hence we find the bond attractive even on the worst terms and expect it to price towards the least favorable end of the indicative range for investors," the analysts wrote.

Qiagen is a Venlo, Netherlands-based maker of research equipment and instruments for the biotech sector. It said the proceeds will help to "optimize the structure of its balance sheet," which includes repaying existing debt, to finance future acquisitions and for general purposes.

Qiagen stock (Nasdaq: QGEN) closed at $15.09, down by 1.24% or 19 cents, on Tuesday.

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