SanDisk jumps with strong earnings; Amylin in line after notes called; UAL prices $726 million deal

By Kenneth Lim

Boston, July 25 - A barrage of news from several fronts kept the convertible bond market busy on Tuesday, with better-than-expected earnings spurring gains and volume at SanDisk Corp.

Meanwhile, Amylin Pharmaceuticals Inc.'s 2.5% convertible due 2011 was up slightly outright after the company called its other series of convertible notes.

In the gray market, UAL Corp.'s $726 million offering of 4.5% convertibles due 2021 were hovering below par for most of Tuesday amid concerns about the credit and takeover risks of the issuer. There was also some confusion among market participants about the deal's unusual arrangement, which will leave UAL with none of the proceeds.

Mercury Interactive Corp. came to life in the after market following Hewlett-Packard Co.'s decision to buy the company for $52 a share, boosting confidence that Mercury will be able to meet its debt obligations.

Also trading on Tuesday was Encysive Pharmaceuticals Inc.'s 2.5% convertible due 2012, which fell about 9 points outright after the U.S. Food and Drug Administration sought more information on a key drug application.

The Encysive convertible traded at 71 against a stock price of $3.75 on Tuesday. Encysive stock (Nasdaq: ENCY) crashed by 40.29% or $2.49 to close at $3.69.

"It was down with the stock, looks like its main drug is getting delayed again," a convertible bond trader said.

Houston-based Encysive said Tuesday that the FDA is putting off a decision on its pulmonary arterial hypertension drug Thelin for the second time this year. The FDA gave Thelin an "approvable letter" in March but sought further data. Encysive submitted a letter in May, and the FDA accepted the drug maker's response in June. But the FDA told Encysive that a substantive issue remained, and Encysive said further clinical trials may be necessary.

"This is an important drug for them, so a delay like this is bad news," the trader said, noting that additional trials would add to the company's costs.

SanDisk gets earnings boost

SanDisk's 1% convertible due 2013 rose about 5 points outright on Tuesday after the flash memory chip maker beat expectations for its second-quarter results.

The convertible traded at about 86.25 against a stock price of $46.20, while SanDisk stock (Nasdaq: SNDK) climbed 14.7% or $5.91 to close at $46.11.

Sunnyvale, Calif.-based SanDisk said late Monday that its second-quarter profit jumped by more than a third to $95.6 million, or 47 cents per share, from $70.5 million, or 37 cents per share, in the year-ago period. Excluding charges, the company earned 60 cents per share, well above Street expectations of 44 cents per share.

"SanDisk was punished the last few months for a large inventory...so there was a lot of concern," a buyside convertible analyst said. "But [in the second quarter] inventories went down...and days-in-inventory went down, so that's significant. That's what's driving the stock up today."

The analyst said that in terms of the company's credit the convertible was unlikely to change much on a dollar-neutral basis and was moving with the stock.

"But the convert is not too bad now," the analyst said. "Somebody who owned it could sell and get some money back right now."

But the analyst said it may pay to remain cautious on buying SanDisk on an outright basis, noting that the company's guidance for the second half of the year was not stellar.

"The guidance is actually pretty weak," the analyst said. "And the pricing projection is fairly flat, fairly bearish."

Amylin's uncalled unchanged

Amylin's 2.5% convertible due 2011 was up slightly on an outright basis after the company said it would call its other convertible series, the 2.25% paper due 2008.

The 2.5% convertible was marked at 155.5 against the stock price of $48.09. Amylin stock (Nasdaq: AMLN) closed at $49.72, up by 7.06% or $3.28. The 2.25% convertible did not trade

Amylin on Monday called the entire $175 million outstanding of its 2.25% convertible due 2008. The move would leave the company, which has a market capitalization of about $6 billion, with only about $200 million in outstanding debt and a healthy heap of cash in the coffers, a sellside convertible bond analyst said.

San Diego, Calif.-based Amylin, whose key drugs include treatments for diabetic conditions, also has a strong product, so the credit spreads on Amylin's remaining debt securities would normally be expected to tighten, the analyst said.

But because the 2.5% convertible is so far in the money, it moves fairly closely with the stock, which is why the spreads on that convertible have not tightened as much, the analyst said.

"It's not really a credit story anymore," the analyst said.

UAL prices $726 million deal

United Airlines parent UAL Corp.'s $726 million offering of 15-year convertible senior limited-subordination notes were stuck below par in the gray market on Tuesday before the deal was priced after the market closed.

The newly priced 4.5% convertible was bid from as low as 97.5 to as high as 99.75 in the gray market, and offered as low as 99.5, a sellside convertible trader said. UAL stock (Nasdaq: UAUA) closed at $27.51, down by 2.45% or 69 cents.

The notes, which are guaranteed by United Airlines Inc., were offered at par and priced with an initial conversion premium of 25% over the two-day volume-weighted average stock price after the market closed Tuesday.

Goldman Sachs was the bookrunner of the Rule 144A deal.

The convertibles were issued to trusts for UAL's employee unions as part of the airline's reorganization scheme, and the trusts in turn sold the convertibles. UAL Corp. will not receive any of the proceeds.

A sellside convertible analyst said the deal did not appear attractive at first glance "because it's UAL and it's an airline, and it doesn't have takeover protection [in the form of a premium make-whole]."

Although there is no make-whole feature in the event of a takeover, the convertibles may be put if there is a change of control.

There was also initial confusion among some analysts and traders over whether the convertibles are new, since all the proceeds go to UAL's unions. The convertibles are newly issued.

"In bankruptcy there are trusts set up for groups where final owners have yet to be determined or such, so they are paying out this group with these proceeds," a sellsider explained.

Mercury revives on buyout

Mercury Interactive's zero-coupon convertible due 2008 inched higher outright and traded at about 105.75 in the after-market against the closing stock price of $39 after Hewlett-Packard offered $52 per Mercury share to buy the company.

Mercury stock (MERQ), which trades on the Pink Sheets, gained 0.85% or 33 cents before the deal was announced. Mercury's 4.75% convertible due 2007 did not trade.

"They're both trading at yields to put," a sellsider said. "So it just makes the credit that much more assured."

Hewlett-Packard on Tuesday said it would buy Mercury for about $4.5 billion, net of cash and debt.

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