AMD rises amid downgrades; XM shaken by reports; Charming Shoppes quiet; JetBlue weathers loss

By Kenneth Lim

Boston, April 24 - Advanced Micro Devices Inc.'s new convertible gained slightly on Tuesday as a ratings downgrade weighed on its debut despite strong interest from investors.

XM Satellite Radio Holdings Inc. appeared weaker amid recent worries that a planned merger with rival Sirius Satellite Radio Inc. will not pass regulatory muster.

Meanwhile, Charming Shoppes Inc. was quiet in the gray market ahead of its deal's pricing, but the offering was described as fair to cheap.

JetBlue Airways Corp. brushed off a drop in its stock with its first-quarter loss seen as a bump in the road. The JetBlue convertibles were quiet in the Street despite a 2.55% or 28 cent decline in the stock, but the JetBlue 3.5% convertible due 2033 was marked ¼ point lower at 96.5 bid, 96.75 offered against the closing stock price of $10.71.

"They reported a loss but that was kind of expected because of all the flight cancellations due to bad weather during the quarter," a buysider said. "They actually beat expectation. They've also taken steps to improve their operations and management is guiding for more cautious expansion, so that's all positive signs. I don't think if you're holding the convertible that you'll be worried at all."

JetBlue, a Forest Hills, N.Y.-based airline, reported a quarterly loss of $22 million, or 12 cents per share, from a year-ago loss of $32 million, or 18 cents per share. Analysts were expecting a loss of about 19 cents per share.

AMD up slightly

Advanced Micro's new 6% convertible senior note due 2015 slipped at the open but ended slightly higher on Tuesday after the deal priced at the cheap end of talk.

The convertible was seen at 99.75 against the opening stock price of $13.76, but was marked at 100.25 bid, 100.75 offered versus its closing stock price of $14.57. The convertible was offered at par. Advanced Micro stock (NYSE: AMD) rose 3.77% or 53 cents on Tuesday.

"They started out a little weak because the stock was off," a sellside convertible trader said. "I know some guys thought that this was an attractive piece of paper, but I think the ratings cuts and the weak stock were hanging over the deal."

Advanced Micro priced its $2 billion overnight offering with an initial conversion premium of 100%. The deal was talked at an initial conversion premium of 5.75% to 6% and an initial conversion premium of 100%.

The size of the deal was originally $1.8 billion with an additional $400 million over-allotment option. The greenshoe is now a further $200 million.

Morgan Stanley was the bookrunner of the Rule 144A offering.

Advanced Micro, a Sunnyvale, Calif.-based maker of computer processor chips, said it will use the proceeds of the deal to fund capped call transactions that have a cap price of $42.12 per share and a strike price of $28.08. At least $500 million of the proceeds will be used to repay part of a term loan from Morgan Stanley Senior Funding incurred in Advanced Micro's acquisition of ATI Technologies Inc. The remainder of the proceeds will be used for general corporate purposes.

A couple of convertible analysts said the deal modeled cheap using a credit spread in the low 400 basis points over Treasuries region and a volatility in the high-30% to low 40% range.

Size seen easing terms

One analyst said the deal may have come cheap because of its size.

"The size of the overnight deal I think it kind of threw some people off," the analyst said. "It's a relatively big deal to come overnight and it's not on a full hedge."

But the analyst said the fact that the convertible could be hedged even with its unusually high conversion premium made it interesting.

"Even though it is such a high conversion premium, it's a pretty high delta," the analyst said. "It's around a 65% delta, so it's not a bad combination of coupon and premium. The fact that it's a 65% delta means people can still hedge it. Because it's so long, eight years, and volatility is relatively high...I think people are looking at that area to set these up on."

"I think if you look back at a lot of the semiconductor names they have a long-term structure, like the Intels, Linear Technologies, Xilinx, those traded through long-term structures. So people will pay for semiconductor volatility," the analyst said.

Another convertible analyst said the deal modeled almost 2% cheap and would have looked attractive to hedge investors because of the high delta.

"If you set it up on a neutral kind of a hedge, it's going to generate positive carry," the second analyst said. "If you put it as a hedge that was more delta neutral, it would definitely make sense just on cash flow."

Even outright accounts may find the convertibles interesting.

"If you like AMD, it will make sense," the second analyst said. "Simply because of the coupon, and the downside participation is not bad either because the bonds will hold up reasonably well. It's a low delta on an outright basis, so between that and the coupon the downside protection is pretty good and in terms of upside participation it's not too bad either."

But a buysider said concerns about the company's credit dulled some of the shine of the new convertible.

"The concern here is that the company's much more levered now and their bond spreads are wider," the buysider said. "I think they're cheap, but if the credit widens it becomes a little less attractive."

Standard & Poor's downgraded AMD's credit rating to B from B+ on Monday with a negative outlook, reflecting "subpar" execution of business plans and a tough market. Fitch Ratings on Tuesday also changed AMD's rating outlook to negative and affirmed the company's issuer default rating at B. Fitch expects to rate the new convertible CCC+ with a recovery rating of 6. The changed outlook reflects lower than expected shipments and intensified competition, Fitch said.

XM weaker as merger questioned

XM Satellite Radio's 1.75% convertible due 2009 was 1/8 point lower at 86 bid, 86.5 offered against a stock price of $10.93 Tuesday amid recent concerns that the company's planned merger with Sirius will not be approved or be as beneficial as expected.

"XM bonds have come in a little here," a sellsider said. "I think the stock's got a couple of negative comments, equity analysts have kind of beaten up the stock the last couple of days. The bonds are in line...What everybody is worried about is people may be holding off on whether it's going to be a combined company."

Washington-based XM and New York-based Sirius are currently pursuing a merger, but need to allay regulators' antitrust concerns. Banc of America equity analyst Jonathan Jacoby said in a note on Monday that investors are too optimistic about the companies' outlooks. If the deal is approved, costs may not fall as much as expected, but if the deal is rejected the high costs may drive some customers away, Jacoby wrote.

Charming Shoppes quiet in gray

Charming Shoppes' planned $250 million of seven-year convertible senior notes did not draw any bids in the gray market on Tuesday but the deal was seen as fair to cheap.

The deal, which was to price after the market closed, was talked at a coupon of 1% to 1.5% and an initial conversion premium of 20% and 25%. The convertibles were to be offered at par.

Charming Shoppes stock (Nasdaq: CHRS) gained 5.04% or 61 cents to close at $12.71.

There is an over-allotment option for a further $25 million.

JP Morgan and Banc of America are the bookrunners of the Rule 144A offering.

Charming Shoppes, a Bensalem, Pa.-based retailer of women's plus-size apparel, said it will use the proceeds of the deal to fund a call of its $150 million outstanding 4.75% convertible senior notes due 2012 and for general purposes.

"It looked OK," said a sellside convertible analyst who has a credit assumption around 200 basis points over Libor and a volatility in the low 30% range.

"I think people will be fine with the credit. You might find some people a little more conservative on volatility, but for those of us who have been following this name for some time, about two to three years ago it was a 35% volatility name. I'm not saying it'll be that high again, but there's a history of higher volatility in this name."

Another convertible analyst said the deal modeled slightly cheap using similar assumptions, and agreed that it was reasonable to be a little more generous for the volatility.

"You could argue back and forth, and if you use like a 30-something vol it's going to model rich to slightly rich," the analyst said. "But when you look at the charts, the average of the historical average for vol, like if you look at the 60- or 90- or 100-day average, it's 31% to 32% now. The 60-day average is lower than that, but it's been quite low and it's gone higher than that and it's probably going to pick up. In the long-term a number a little bit better than 30 is probably OK to use."

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