New SanDisk edges up; existing SanDisk recovers; Covanta plunges outright, adds on hedge

By Rebecca Melvin

New York, Oct. 24 - SanDisk Corp.'s newly priced 0.5% convertibles traded up about 2 points on an outright basis in early action Thursday after the upsized $1.3 billion of the seven-year senior notes came at the price points of revised talk.

The SanDisk 0.5% convertibles due 2020 were quoted at 102 bid, 102.25 offered with the underlying shares up 1%. At the close, the paper was quoted at 102 bid, 102.375 offered versus the closing share price of $69.41, which was up 1.7%.

SanDisk's existing 1.5% convertibles due 2017 seemed to reclaim levels seen before the new deal was launched and were quoted at 147.25 versus an underlying share price of $69.25 early in the session.

Even though pricing was seen as rich to start, "SanDisk is a pretty appreciated story," an East Coast-based analyst said, and he thought that it was likely to continue to richen like other recent new issues that came with pretty tight pricing.

"Other new issues have richened up 3 or 4 points," the analyst said, referring to Cubist Pharmaceuticals Inc. and BioMarin Pharmaceutical Inc.

In early September, Cubist priced a dual-tranche deal of $300 million of 1.125% convertibles due 2018 and $400 million of 1.875% convertibles due 2020. On a dollar-neutral, or hedged, basis, the Cubist As jumped about 4 points on their debut, while the Bs gained about 2 points delta neutral.

In early October, BioMarin priced $340 million of 0.75% convertibles due 2018 and $340 million of 1.5% convertibles due 2020, with the shorter-dated issue trading Thursday at 107.554, which was up 0.7 point on an outright basis, according to Trace data.

Covanta Holding Corp.'s convertibles plunged on an outright basis with lower shares on Thursday but improved on a dollar-neutral, or hedged, basis after the Fairfield, N.J.-based waste disposal and renewable energy company lowered its full-year 2013 guidance.

SanDisk adds on debut

SanDisk's newly priced 0.5% convertibles traded at about 102 bid, 102.25 offered in the early going on Thursday and were seen at 102 bid, 102.375 offered versus a share price of $69.41 at the market close.

A second quote was 101.3 bid, 101.55 offered versus a share price of $68.29.

One trader thought that the paper should be trading on about a 60% delta.

Shares of the Sunnyvale, Calif.-based flash storage company edged up $1.17, or 1.7%, to $69.41.

SanDisk's existing 1.5% convertibles due 2017 traded at 147.25 versus an underlying share price of $69.25.

"Price and valuation on the new issue looks way ahead of itself, at least relative to the old issue," a New York-based trader said.

But while it was seen as rich, it hasn't been the only one of late. One analyst compared to new SanDisk deal to recent new issues that have richened up 3 points to 4 points from where they came, including Cubist and BioMarin.

He said that the size of the deals had a lot to do with their appeal. "The deals are large enough that the index chasers want to be in there." He also said the scarcity of balanced paper was driving the trend as well as the fact that recent issuers were known names that investors know and like.

He contrasted the latest trend with a spate of smaller deals from a lot of mortgage-related or finance names, which the market also recently experienced.

"Those deals ended up doing fine. But investors aren't looking for $100 million to $200 million deals from one-off companies. They like the latest wave of issuers, which are companies that people know and understand," the analyst said.

Liberty Media Corp.'s $900 million of 1.375% 10-year convertible senior notes was another deal that fit into the latest wave, but it didn't richen up as much as the Cubist and BioMarin deals, he noted.

SanDisk priced an upsized $1.3 billion of seven-year convertible senior notes at par late Wednesday to yield 0.5% with an initial conversion premium of 35%, according to a syndicate source.

The Rule 144A deal was initially expected to be $1 billion in size, and pricing came at the talked price points that were tightened during marketing from a 0.75% to 1.25% yield and a 30% to 35% premium.

Goldman Sachs & Co. was bookrunner for the non-callable notes, which have a greenshoe for up to another $200 million of notes.

The notes have full dividend protection in the form of a conversion rate adjustment for any quarterly dividend in excess of $0.225 per share, as well as takeover protection.

A portion of the proceeds is being used to fund the cost of a call spread, which increases the effective conversion price of the debt from the issuer's perspective. The warrant strike is $122.922.

Proceeds will also be used to repurchase shares of common stock from purchasers of the notes and for repayment of debt at maturity or via repurchases from time to time. In addition, proceeds will be used for potential strategic investment or acquisitions, to repurchase common stock under existing stock repurchase programs and for other general corporate purposes, including capital expenditures relating to manufacturing and technology.

Covanta adds on hedge

Covanta Holding's 3.25% convertibles due June 1, 2014 skidded as much as 20 points, touching a low mark of 112 and change after having traded as high as 132 on Wednesday.

But on a dollar-neutral basis the bonds expanded 1.5 points or more depending on the delta hedge, a New York-based trader said.

Shares of the Fairfield, N.J.-based waste disposal and renewable energy company fell $2.51, or 12%, to $17.72.

"CVA went from a 100% delta down to an 85%, maybe even lower," the trader said, adding that the bonds expanded, but "guys were on all sorts of different deltas coming into today so it is hard to pinpoint exactly how much they expanded."

Covanta's third-quarter results beat estimates by a penny and revenue was in line with expectations. But Covanta lowered its full-year earnings pretty significantly. Its adjusted EBITDA is now expected to be $480 million to $495 million, which is down from prior guidance of $500 million to $530 million. For full-year 2012, the company's adjusted EBITDA was $492 million.

The company also pulled free cash flow guidance down to $220 million to $240 million from $250 million to $280 million. For full-year 2012, free cash flow was $262 million.

And adjusted earnings per share are now expected to be 33 cents per share to 43 cents per share, down from 40 cents per share to 50 cents per share.

Third-quarter adjusted EBITDA in the third quarter was $156 million, compared to $150 million in the year-earlier quarter. Adjusted earnings per share was 28 cents for the quarter, up from 25 cents in the year-earlier period.

Guidance was lowered due to slower-than-expected organic growth, lower-than-expected steam demand and unscheduled outages, but positive developments included two important transactions including a 20-year New York City waste contract and the acquisition of a Camden, N.J.-based energy-from-waste facility.

Mentioned in this article:

BioMarin Pharmaceuticals Inc. Nasdaq: BMRN

Covanta Holding Corp. NYSE: CVA

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Liberty Media Corp. Nasdaq: LMCA

SanDisk Corp. Nasdaq: SNDK

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