Intel gains on stock upgrade; Alleghany seen slightly cheap; Freeport-McMoran rises with copper prices

By Kenneth Lim

Boston, June 14 - Wednesday was a quiet day for the convertible bond market, but semiconductor chip names gained outright on the back of upbeat equity research reports.

Meanwhile, Alleghany Corp. announced a $260 million offer of three-year mandatory convertible preferred stock that market sources said was just slightly cheap and likely to receive limited market interest.

The overall market had a subdued session on Wednesday.

"It's a pretty quiet day, there's nothing major happening," a buy-side convertible trader said.

Freeport-McMoran Copper and Gold Inc.'s 5.5% convertible preferred gained about 2.25% outright as the metal mining company's stock rose on firmer metal prices. The convertible traded at 1,110 against a stock price of $43.75 on Tuesday.

Copper futures recovered early Wednesday from a sharp slide the day before. Shares of New Orleans, La.-based Freeport-McMoran (NYSE: FCX), which fell 7.82% on Tuesday, gained 4.46% or $1.95 on Wednesday to close at $45.70, up 4.46% or $1.95.

"The stock corrected, and this is an equity-sensitive name," a convertible trader said.

Nabors Industries Ltd. also rose slightly on an outright basis in line with its stock as crude oil prices climbed further. The land-drilling contractor's new 0.94% convertible due 2011 traded at 94.5 versus a stock price of $31, about a quarter-point higher outright than levels from Tuesday.

Shares of Bermuda-headquartered Nabors (NYSE: NBR) closed at $30.95, up 3.03% or 91 cents.

Level 3 Communications Inc.'s newest 3.5% convertible due 2012 gained about two points outright in line with its stock on Wednesday. The convertible changed hands at 99.125 against a stock price of $4.25. Level 3 stock (Nasdaq: LVLT) improved 2.68% or 11 cents to end at $4.21.

Level 3 said Tuesday after the market closed that it would redeem about $460.5 million of debt securities maturing in 2008 using the proceeds of from the issuance of the 3.5% convertible and 125 million shares.

"That's good for the credit, they're taking care of all that debt," a sellsider said.

Alleghany deal slightly cheap, interest limited

Alleghany's planned $260 million offering of three-year mandatory convertible preferred stock is slightly cheap at the middle of price talk terms and is likely to receive limited interest, market sources said.

Alleghany plans to price the preferreds on June 19, and price talk guides for a dividend of 5.25% to 5.75% and an initial conversion premium of 18% to 22%. Alleghany stock (NYSE: Y) slid 4.68% or $13.10 to close at $266.90 on Wednesday.

Merrill Lynch is the bookrunner of the off-the-shelf offering.

Alleghany, a New York-based property and casualty insurer, will add the proceeds of the deal to the capital and surplus of its insurance operating units, and use them for general corporate purposes.

A sellside convertible analyst said the offering modeled just over 1% cheap using a 3-point volatility spread.

"It looks like another fully valued mandatory," the analyst said.

The analyst said that at those terms, the offer would be just slightly interesting, and even then probably only to outright investors.

"You're effectively short gamma...that means that as the stock is rising, you're buying it, which is not what hedge funds want to do," the analyst said. "Usually they want to sell it when the stock is rising."

A Connecticut-based convertible analyst also thought that interest in the deal was likely to be narrow. "It's a mandatory and those usually don't attract that much attention," the analyst said.

Alleghany stock also does not trade much, and the potential problems that would mean for the borrow could also put off hedge investors, the analyst said.

"It's not being done for the hedge community, it's probably going to go to outrights who will just hold on to them," the analyst said.

The Connecticut analyst said that valuations aside, the offering raised the possibility that there may be more issuance coming from the insurance sector as the hurricane season develops.

"Off the top of my head, I'm thinking that going into what might be a bad hurricane season...there might be some property insurance companies that might want to raise some capital," the analyst said.

Intel gains in line on stock upgrade

Semiconductor chip names led by Intel Corp. were better outright on Wednesday after an analyst from Goldman Sachs upgraded some stocks in the sector based on valuations.

Intel's 2.95% convertible due 2035 traded about a point higher at 83 against a stock price of $17.80, a sellsider said. Intel stock (Nasdaq: INTC) rose 3.56% or 61 cents to finish at $17.73 on Wednesday.

Intel is a Santa Clara, Calif.-based semiconductor chip maker.

Goldman Sachs analyst James Covello on Wednesday raised his recommendation on Intel stock to outperform from in line, citing the low valuations on the stock while warning of a wave of negative news from the company.

"We expect the company to imminently announce an earnings miss, guide down Q3 significantly, and announce a significant restructuring," Covello wrote in the report.

A New York-based convertible analyst thought that the start of summer may be too early to feel excited about Intel.

"I don't know what Goldman is smoking, but seriously I think Intel is a name that you buy at the end of summer" when new products and expectations of holiday season sales can be expected to boost the stock, the analyst said.

Beyond the equity story, the analyst said Intel's convertible remains "significantly overvalued."

"I don't know that a stock rally today is going to change that view all that much," the analyst said.

The analyst said the Intel convertible has been pushed up in recent weeks with the rush for investment-grade volatile paper.

"People think there's a risk of absolute spread widening, and when that happens it's going to hit the non-investment grade paper more than investment-grade paper," the analyst said. "There's a flight to quality, and Intel is a very solid credit."

But even with Intel's credit, current prices suggest an implied volatility of about 40%, compared to Intel's historical volatility around the low 20s, the analyst said.

"You're paying a minimum of 10 vol points to own this," the analyst said.

Other semiconductor names seen on Wednesday included ON Semiconductor Corp.'s zero-coupon convertible due 2024, which was flattish at 82.875 against a stock price of $5.50. ON Semiconductor stock (Nasdaq: ONNN) rose 1.11% or 6 cents to close at $5.47. ON is a Phoenix, Ariz.-based maker of power and data management semiconductors.

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