Planned Micron sees revisions during marketing; existing Micron convertibles trade mixed

By Rebecca Melvin

New York, April 12 -Micron Technology Inc.'s planned $870 million convertible deal was juiced up during marketing Thursday with the addition of a coupon make-whole feature, which guarantees holders receive all the coupons they would otherwise have received if the notes are called during a provisional call period, market sources said.

Also during marketing, price talk was revised downward on the initial conversion premiums of the dual-tranche deal and pricing on the coupons looked to be coming at the cheap end, sources said.

Micron syndicate sources could not be reached ahead of Prospect News' deadline for confirmation of these details.

The new deal was seen pricing late Thursday after being launched after the market close on Wednesday.

Of Micron's five existing convertibles, the longer-dated ones were said to be down on a dollar-neutral, or hedged, basis, but the shorter-dated issues were up slightly on hedge.

Elsewhere, Pittsburgh-based Wesco International Inc., a provider of electrical products and other industrial supplies and services, was in trade, with at least one large buyer in the market, according to a large New York-based bank.

The Wesco paper was at 240.51 at the close, and looked to be in line or slightly lower on a hedged basis with the underlying shares of the issue higher by nearly 7%.

Meanwhile, DFC Global Corp.'s new 3.25% convertibles, which debuted in the secondary market on Wednesday and gained 2 points dollar neutral, remained strong on Thursday, and higher by another small amount, to 104.59 versus an underlying share price of $17.40 near the close.

There wasn't trade heard in Rite Aid Corp.'s 8.5% convertibles due 2015 after the Camp Hill, Pa.-based drugstore chain reported a narrower quarterly loss.

The secondary market on Thursday remained pretty quiet as has been the case all week. But the primary market was picking up, an analyst said.

The convertible market had two new issues debut in the secondary on Wednesday and anticipated the new Microns' release for Friday's session.

Micron terms revised

At the end of Thursday's session, the pricing on the new Micron A tranche was said to be set at 2.375% with an initial conversion premium of 35%. Originally the A tranche was talked at 1.875% to 2.375% with an initial conversion premium of 37.5% to 42.5%.

The pricing on the B tranche was said to be set at a 3.125% coupon with a 40% premium. Originally the B tranche was talked to yield 2.625% to 3.125% with a premium of 42.5% to 47.5%.

Syndicate sources at Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, which are joint bookrunners of the Rule 144A deal, could not be reached to confirm the revisions.

Both tranches are for a $435 million deal base with $60 million greenshoes.

Early on in the session, the deal was adjusted to include a coupon make-whole provision for the provisional call periods of both tranches, sources said.

The coupon make-whole was said to help the deal somewhat but perhaps not a lot, with one sellsider saying, "Adding the coupon make-whole is bigger for the second [tranche], but it adds juice to them both."

Tranche A is non-callable for four years and then provisionally callable at 130% of conversion for three years before becoming freely callable. The initial investor put for tranche A is after seven years.

Tranche B is non-callable for five years and then is provisionally callable for four years at 130% of conversion, before becoming freely callable. Tranche B has an investor put after nine years.

Initially there may have been some difficulty in placing the B tranche, which is longer dated and has a put after nine years, compared to seven years for the A tranche, a market source said.

Micron credit debated

One analyst put a 500 basis point credit spread on the A tranche and a 40% vol. on it to get 102.75 fair value at the midpoint of talk. On the B tranche, he used 525 bps and 38% vol. to get 102.375 fair value at the midpoint of talk.

The underwriters were said to have guided to tighter credit spreads of 400 bps and 425 bps, respectively, for the A and B tranches and 35 vol. to 37 vol. flat, sources said.

"That makes them both look around 1.5 pts cheap at mids," a sellsider said, adding that "neither structure nor pricing are particularly attractive."

A second source said he was using wider spreads than the 500 bps and 525 bps credit spread with 45% vol. and getting about 2% cheap.

An East Coast-based buysider said, "I think the credit is wider. The convertible market has enough Micron paper. I don't like the DRAM business, so I might be biased, but this is not cheap enough for a serial convertible issuer."

Existing Micron mixed

Of the five existing Micron convertibles, some of which have the coupon make-whole feature and some of which do not, the longer-dated notes were most affected by the new deal and seemed to be down a little more because of it.

The Micron 1.5% convertibles due 2031 were down 1.625 points on a dollar-neutral basis, and the 1.875% convertibles of 2031 were down 1.5 points.

"Those are the old A and Bs," a sellsider said. The new paper is being referred to in the market as C and D, he said.

But the 1.875% convertibles due 2027 were up 0.5 point on a dollar-neutral basis, and the 1.875% convertibles due 2014 were up 0.125 point.

There are also Micron 4.25% convertibles due 2013, but they are in-the-money in the 140s with a 4% premium and have 1.5 years in duration.

Theoretically a new deal is supposed to price cheaper than existing paper, and looking at current SanDisk pricing, among other issues, may have been why this deal seemed to be struggling somewhat, a sellsider said.

Proceeds are earmarked for general corporate purposes, including working capital, capital expenditures, strategic acquisitions, joint ventures and other investments, to repay debt and to cover the expense of the capped-call spread.

Oe sellsider guessed that Micron is issuing the new paper to have cash on hand to take advantage of Japan's Elpida Memory Inc. bankruptcy.

"It might be a war chest for them so they can be opportunistic with Elpida," the sellsider said.

Elpida filed for bankruptcy protection from creditors in late February.

Micron launched its deal of $870 million of new convertibles late Wednesday. Its basic structure is similar to $600 million of convertibles the Boise, Idaho-based maker of semiconductor devices priced in July 2011.

In connection with the new convertibles, Micron plans to enter into capped call transactions with counterparties that may include the underwriters and their affiliates.

Mentioned in this article:

DFC Global Corp. Nasdaq: DLLR

Micron Technology Inc. NYSE: MU

Rite Aid Corp. NYSE: RAD

Wesco International Inc. NYSE: WCC

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