New Intel flattish in gray; existing Intel contracts; AMD gains ahead of earnings; CIT mixed

By Rebecca Melvin

New York, July 21 - Intel Corp.'s newly priced 3.25% convertibles straddled the flat line in the gray market Tuesday ahead of final pricing after market close.

They were "less a little to plus a little," a New York-based sellside trader said of the offering, which priced at the midpoint of talk and was upsized to $1.75 billion from $1.5 billion.

Meanwhile, the chip giant's existing 2.95% convertibles due 2035 were lower in trading, with sources saying they contracted 2.5 points to 3.5 points.

The new Intel offering was expected to put a permanent damper on the old paper, and sources agreed that the cheaper the new paper's pricing came, the cheaper the existing convertibles would have to be.

Intel competitor, Advanced Micro Devices Inc., saw its convertibles gain 1 point to 1.5 points ahead of its second-quarter earnings released after the market close.

Based on Intel's strong quarterly earnings posted last week and other factors, many anticipated strong numbers from Advanced Micro, but the chip maker's loss exceeded forecasts, and its common shares sank in after-hours trading.

CIT Group Inc.'s convertible preferred and convertible mandatory shares traded mixed on the latest headlines associated with the New York-based lender to small- and medium-sized businesses.

This time the company warned bankruptcy was still a possibility even though a group of major bondholders have put up bridge financing and there is a tender offer on debt maturing Aug. 17.

The rest of the bank sector was off slightly on light volume, a New York-based sellside trader said.

But UAL Corp. was higher ahead of its second-quarter earnings report, and Eastman Kodak Co. was essentially flat, a New York-based sellside trader said.

The market was slightly tempered from recent sessions, as equities wavered, but in tandem with equities that ended to the upside, so did convertibles.

"I'd say it was strong," a sellsider said of the convertibles market. "I may not have said that at noon, but I'm saying it now."

Intel wavers in gray

The new Intel deal was seen 0.125 point below par to 0.375 point above par in the gray market ahead of pricing late Tuesday.

Intel's existing 2.95% convertibles traded at 87 bid, 87.25 offered versus $18.90, which was down 2.5 points from Monday, according to a sellsider.

Another sellside source said the existing paper was lower by 3.5 points.

Shares of the Santa Clara, Calif., chip giant ended unchanged on the day at $18.90.

According to the sellsider, who said his firm traded the new issue in the gray "all morning," there was no speculation ahead of time that Intel was going to issue another convertible.

"But the stock has seen a nice move upward post earnings, which makes the timing good," he said.

Intel was expected to price $1.5 billion of convertibles to yield 3% to 3.5%, with an initial conversion premium of 18% to 22%.

The lack of conviction on the paper told market participants that the terms weren't that good, and it also made the existing paper less appealing.

But an outright buysider said: "The convertible market is willing to buy quality convertibles at terms that are attractive to issuers. Many managements seem to overlook the opportunity to raise capital at attractive rates. Wise managements raise capital before they need capital. Ford management was smart enough to advance fund its maturities and - so far - avoid bankruptcy.

It was expected that if the new Intel convert prices on the cheap end, the existing paper will trade lower.

"The new issue will continue to price the old issue. It will no longer operate in its own universe," a sellside trader said.

Advanced Micro adds ahead of earnings

Advanced Micro's two convertible issues gained about 1 point to 1.5 points ahead of its earnings report, which disappointed investors, at least initially, who took AMD common stock lower in after-hours trading.

The Advance Micro 6% convertibles traded at 54.50 bid, 55.25 Tuesday, while the Advanced Micro 5.75% convertibles traded at 70.375 bid, 71.0125 offered, according to sellsiders.

The Sunnyvale, Calif.-based chip company recorded a second-quarter net loss of $335 million, which was better than the year-earlier $1.19 billion loss, but not as good as analysts had forecast.

Revenue fell 13% to $1.18 billion from $1.36 billion a year earlier.

On Monday, FBR Capital Markets put out research on Advanced Micro, rating it initially at "market perform," but subsequently upgraded it midsession to "outperform," citing cash generation prospects for the company.

FBR analysts Craig Berger and Robert Pikover said they thought Advanced Micro looked better after they received updated distributor checks and ran more sensitivities on its cash generation potential.

"Our new distributor checks suggest Asian distributors had a stronger-than-expected June quarter and are more positive about 3Q shipment prospects. In addition, recent checks for AMD and the PC supply chain have strengthened," Berger and Pikover wrote.

"First, recent PC build checks (07-13-09) with the world's top notebook ODMs and desktop motherboard makers show that 2Q PC builds grew an impressive +7% sequentially, with 3Q PC builds expected to grow another 13% sequentially as Asian demand remains robust."

"Second, AMD's recent production start checks (07-09-09) have improved with 2Q production having increased by +78% QOQ (better than last month's +63% QOQ) and 3Q production now set to grow +1% sequentially off the higher base (better than last month's -13% sequential decline)."

"Finally, Intel's stellar results and 3Q09 revenue guidance suggest meaningful upside for AMD. Using our now higher financial estimates and accounting for roughly $150 million of 'phantom depreciation' above sustainable capex, we forecast AMD will generate about $160 million of free cash flow in 2H10, a dramatic improvement from the significant losses we expected three months ago," the analysts wrote.

CIT remains volatile

CIT's 8.75% perpetual convertible preferred shares, or the C shares, traded down to end at 4.80, off 1.75 point.

The CIT 7.75% mandatory convertibles due 2015 moved up 1.25 point to 8.05.

"It's interesting to watch these two," a sellsider said, commenting on how the C paper trades down on bankruptcy fears, while the mandatories trade down when it looks like bankruptcy will be averted, and vice versa.

"It was really active early on with bids wanted. It started higher, then faded, then came back," the sellsider said.

CIT shares ended down 27 cents, or 22%, to $0.98.

CIT said that its new $3 billion senior secured credit facility from bondholders carries an interest rate of Libor plus 1,000 basis points, with a 3% Libor floor.

Borrowings will be used for general corporate purposes, working capital needs and to purchase notes accepted for payment in the tender offer.

According to an 8-K filing Tuesday, the entire $2 billion of immediate availability has been drawn.

In addition the company has made a tender offer for its floating-rate notes due Aug. 17 and said in the filing that if the tender was unsuccessful, then a bankruptcy is still possible.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

CIT Group Inc. NYSE: CIT

Eastman Kodak Co. NYSE: EK

Intel Corp. Nasdaq: INTC

UAL Corp. Nasdaq: UAUA

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