Lam Research issues expand on hedged basis on debuts; energy names expand on lower oil

By Rebecca Melvin

New York, May 6 - Four new issues priced in the convertibles market during the first week of May, putting May on track to being significantly better than April, when only five new issues priced for the entire month.

For May so far there has been $1.47 billion in new issuance, compared to about $1.3 billion for all of April.

Lam Research Corp. was definitely the name of the day Friday after the Fremont, Calif.-based semiconductor equipment maker priced two upsized tranches of five- and seven-year paper at the rich end of talk.

The Lam bonds traded up out of the gate in secondary dealings and closed higher by about 2 to 2.5 points on swap compared to issue price.

Elsewhere, he convertibles market was very quiet on meager volume, sources said.

For the week overall, the convertible market saw some good gainers on increased volatility, however. Energy stocks for example took a beating as commodities including crude oil dropped. As a result names like SM Energy Corp. and Western Refining Inc. expanded somewhat on a hedged basis.

SM outright holders sold the name and hedged players bought in, so the issue shifted more into hedged hands, a New York-based sellside trader said.

MGM Resorts International was up about 1.5 point on swap for the week after that paper strengthened on Wednesday as shares surged up 10% in reaction to a narrower quarterly loss.

Savient Pharmaceuticals Inc. expanded Thursday by 3 points amid a 23% plunge in the underlying shares after the East Brunswick, N.J.-based biopharmaceutical company reported a wider quarterly loss that missed estimate.

Overall, volatility increased for the week with equities selling off midweek and then rallying strongly early Friday on U.S. payrolls data, before some selling resumed in the afternoon on rumors that Greece was considering dropping out of the euro zone and re-establishing its own currency.

Greece later denied those rumors.

"I was surprised that we rallied that much on the non-farm payroll beat and that no one really cared about the higher unemployment, and then that we sold off on Greece," a New York-based sellside trader said.

Lam adds on debut

Lam Research priced an upsized $750 million in two tranches, with the smaller-coupon notes, or the 0.5% convertibles due 2016, and the larger-coupon, longer-dated notes, the 1.25% convertibles due 2018, both moving up outright and also by a couple of points on a hedged basis on their debuts Friday.

Lam Research's 0.5% convertibles due 2016 traded up to up to 104 bid, 104.5 offered, with the shares up in early trade on their debut Friday. Later, the 0.5% convertibles were seen at 103.375 bid outright, with the stock at $48.60, according to pricing sources. And they closed at about 103.125 bid, 103.625 offered versus a $48.63 share price.

Lam Research's 1.25% convertibles due 2018 traded up to 103.375 bid, 103.875 offered, versus a share price of $49.00 early in the session, and they were seen closing at about 103.375 bid, 103.875 offered, versus a share price of $48.63.

Shares of the semiconductor equipment company climbed $1.07, or 2.3%, to $48.63 on Friday.

Both issues expanded on a hedged basis. But there was some difference of opinion on just how much.

With the stock up near $49 or about 3%, and both bonds at 103.5 to 104, the rise was considered about 2 points on the A tranche and 1.5 points on the B tranche, on a dollar-neutral basis, according to one sellsider.

At another point during the session the Lam A paper was seen having gained 2 to 2.5 points and the Lam B paper was seen having added 2.5 to 3 points, according to a New York-based sellside trader.

A third source said that at the close, both issues were called higher on swap by about 2 points to 2.5 points.

Both tranches were upsized to $375 million in size from $350 million and both have a $75 million greenshoe, which was increased from $50 million.

J.P. Morgan Securities LLC and Goldman Sachs & Co. were the joint bookrunners of the Rule 144A offering.

The bonds are non-callable for life with no puts. There is takeover and dividend protection.

The notes have contingent conversion subject to a 130% price hurdle and have share settlement.

A portion of the proceeds will be used to repurchase 1 million shares of common stock from initial purchasers of the notes in privately negotiated transactions.

Lam Research entered into privately negotiated convertible note hedge and warrant transactions with initial purchasers or affiliates in connection with the offering. And these transactions boost the initial conversion premium from the issuer's perspective to 50% for the 2016 notes and 60% for the 2018 notes.

A small portion of the proceeds will be used to pay the cost of the convertible note hedge transactions. The balance will be used for general corporate purposes, including working capital and capital expenditures.

Lam Research may also use a portion of the net proceeds to acquire other businesses, products or technologies, or to repurchase shares of common stock under its share repurchase program.

SM expands on hedge

SM Energy's 6.625% convertibles due 2019 traded late Friday at 128.8 versus a share price of $65.27.

"There was more of it yesterday, but a bunch of prints are going up late in the day," a New York-based sellside trader told Prospect News Friday.

The notes are up about a point on swap for the week depending on the amount of hedge, which is seen on average around 80%. Moves were seen in other energy convertible names, but perhaps by not as much.

"Energy stocks got hammered this week, but on swap some of the converts expanded with the vol. picking up," the trader said.

"Before earnings, SM's stock was $75; now its $65 and people are looking at it as a gamma play," the sellsider said, adding that a lot of the paper shifted from outright to hedged players this week.

"The SM paper has a call-put in April of 2012 and a lot of vol. is anticipated over the next year," he said, attracting swap buyers.

Mentioned in this article:

Lam Research Corp. Nasdaq: LRCX

MGM Resorts International NYSE: MGM

Savient Pharmaceuticals Inc. Nasdaq: SVNT

SM Energy Corp. NYSE: SM

Western Refining Inc. NYSE: WNR

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