Planned Cypress Semiconductor looks cheap; Weatherford exchangeable rebounds with oil

By Rebecca Melvin

New York, June 20 – Cypress Semiconductor Corp.’s planned $250 million of 5.5-year convertible senior notes looked cheap at terms that were talked before pricing was fixed, a convertibles trader said on Monday.

The deal, which was expected to price late Monday, was talked at a 4.5% to 5% coupon and a 27.5% to 32.5% initial conversion premium.

Using a credit spread of 700 basis points over Libor and 35% vol., the deal modeled more than 4 points cheap at the midpoint of talk, the trader said, and the credit spread seemed wide to begin with, he added.

Shares of the San Jose, Calif.-based semiconductor manufacturer ended the session down 44 cents, or 4%, at $10.18 on the heels of the deal launch.

Cypress Semiconductor’s existing 2% convertibles due 2020 traded up to 206.25 from 189 previously, according to Trace data. But the convertible only traded a couple of times, a New York-based trader noted.

There is speculation that Cypress may buy back a portion or all of the older deal, which is relatively small at $150 million.

“It is not actively trading. There is some potential that the company is looking to buy them back and people are waiting on that. We’ll see,” the trader said of the existing Cypress bonds.

Elsewhere, Weatherford International Ltd. was a notable name in a market, which was generally trading quietly. The Weatherford exchangeable, which priced June 1, added back another 1.5 points to trade at 114.4, according to Trace data. The exchangeables had traded as high as 120. The exchangeables and underlying shares, which were up a dime, or 1.7%, at $6.07, were both better in tandem with a lift in crude oil prices. The benchmark West Texas Intermediate crude oil contract was up 2.5% at $49.20 per barrel.

China technology stocks were a bit higher on Monday, and the convertibles of those issuers were in focus. Vipshop Holdings Ltd.’s 1.5% convertibles due 2019 gained about 0.5 point in active trade, ending the session around 98.85, which was up from 98.23 on Friday. Vipshop’s common stock gained 33 cents, or 3%, to $11.22.

There was no real news on the Guangzhou, China-based online discount retailer, a trader said. But other China tech convertibles also changed hands on Monday. Ctrip.com International Ltd.’s 1.25% convertibles due 2018, or the B tranche, moved up a point or more to 119 from 118 to 117 on Friday. Ctrip shares gained $1.00, or 2.8%, to trade at $39.13.

Twitter Inc.’s convertibles were up about 0.3 point after a small acquisition by the company and amid renewed takeover chatter following the LinkedIn Corp. M&A news last Monday.

Twitter’s 1% convertibles due 2021 traded at 88.55 with shares at $16.30. Last week the bonds traded at 86, with shares at about $15.00.

In the broader markets, the major equity indices traded up after notching losses last week. The Nasdaq stock market added 36.88 points, or 0.8%, to 4,837.21.

Cypress deal looks cheap

As for Cypress Semiconductor’s offering, the Libor plus 700 bps credit spread used to value the new deal was seen as possibly too wide given that the company’s existing 2% convertibles due 2020 have an implied spread of 350 bps over Libor, a trader said. But the bond profiles of the two issues are different, he pointed out.

The company has a $450 million term loan due in 2020, which is the same year that the existing convertibles mature.

“The 2022 maturity has a lot of debt online to where the assumption is more like a 700 [bps] credit,” he said.

“They have slightly different profiles, so it will be interesting to see how people extrapolate the credit spread past the current issue,” he said. “It’s an interesting deal.”

The $250 million base deal has a $37.5 million greenshoe and was being sold via BofA Merrill Lynch and Credit Suisse as joint bookrunners.

The notes are non-callable with no puts.

Proceeds are being used, together with an additional $450 million term loan under its existing credit facility, to finance its previously announced acquisition of Broadcom Corp.’s Wireless Internet of Things business and certain related assets, to repay about $107 million in revolving loans under Cypress’ existing credit facility and to pay related fees and expenses.

Proceeds will also be used to pay the net cost of capped call transactions with one or more of the initial purchasers of the notes. The transactions are intended to reduce potential dilution of the common shares upon conversion of the notes and to offset cash payments that may be required.

Cypress is a San Jose, Calif.-based semiconductor manufacturer.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Cyprus Semiconductor Corp. NYSE: CY

Twitter Inc. Nasdaq: TWTR

Vipshop Holdings Ltd. Nasdaq: VIPS

Weatherford International Ltd. NYSE: WFT

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