Morning Commentary: New Brocade convertibles expand on swap; market ‘better for sale’

By Rebecca Melvin

New York, Jan. 9 – Brocade Communications Systems Inc.’s newly priced 1.375% convertibles traded up on both an outright and hedged basis early Friday after the San Jose, Calif.-based storage area networking company priced $500 million of the five-year notes at the rich end of talked terms.

The new Brocade convertibles due 2020 were quoted at 102.5 bid, 103 offered with the underlying shares at $11.80. Assuming a 53% delta, that was 2.5 points to 3 points of expansion on a delta-neutral basis, a New York-based trader said.

A second trader, based in Connecticut, said that the expansion was probably 0.125 point to 0.25 point better from that level, “but in the same ballpark.”

Brocade shares were up more than 1% at $11.95.

Elsewhere convertibles were being offered in what one trader said was reflective of the equities market. If stocks are up, convertibles have been better to buy this week, and if stocks are lower, then they have been better for sale.

United States Steel Corp.’s 2.75% convertibles are a case in point. On Friday they changed hands lower by more than a point at about 119, and shares were off 3% at about. $24.42. Earlier in the week, the U.S. Steel 2.75% convertible was quoted up at 119.75 bid, 120.5 offered versus an underlying share price of $25.00. The bonds trade on a delta hedge in the low 70% range.

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