New Microns add on hedge; planned Accuray upsizes, looks cheap; existing Accuray expands

By Rebecca Melvin

New York, Feb. 7 - Micron Technology Inc.'s two new convertibles added some on a delta-neutral basis on their debut in the secondary market Thursday but were surprisingly quiet after the upsized tranches priced at the tight end and beyond the tight end of talk, market sources said.

"There is almost nothing in the aftermarket," a New York-based trader said in midafternoon trading.

A closing market was 101.25 bid, 101.75 offered versus a share price of $7.73 for the new Micron 1.625% convertibles, or the E notes, which are putable in five years. This paper traded above 102.5 out of the gate, according to syndicate sources.

The new Micron 2.125% convertibles, or the F notes, which are putable in seven years, were seen late 99 bid, 99.5 offered versus a share price of $7.73 at the close, following trades at 100.25 in the early going.

Given that the underlying shares of the Boise, Idaho-based chipmaker traded down during the session by nearly 3%, both convertibles were seen up on a delta-neutral, or hedged, basis, a syndicate source said.

Meanwhile, there was some weakening in the rest of the Micron capital structure as well. The older Micron convertibles were seen weaker by a point or less.

With the newest Micron issues, the company has become the fourth largest issuer of convertible paper in the space, with $2.9 billion in issuance outstanding, a syndicate source said.

Whether the $2.9 billion of issuance had created buyer fatigue or whether many market players are disinterested by Micron's fundamentals, the result appears to be apathy: "It isn't a name I follow; haven't for years," an East Coast-based buysider said.

Elsewhere, there was some focus on Accuray Inc.'s planned convertible issue, which was upsized to $125 million during marketing from an initially talked $75 million deal size.

The deal models a couple of points cheap, using an implied credit spread of 1,700 basis points over Libor and a 40% vol.

Accuray's existing convertibles expanded about 1 point to 1.5 points on a delta-neutral basis, even as some players sold the older notes to make room for the new ones.

But many players hadn't seen any sign of it in the market. "There's two big shops leading a small deal, so I doubt I'll ever see it," a New York-based sellsider said.

Elsewhere, Exide Technologies' convertibles, with a small amount left outstanding and due in September, slipped a point outright after the Milton, Ga.-based battery maker and recycler reported that it swung to a loss in its fiscal third quarter late Wednesday. The convertibles, with their short duration, traded down to 94.25, while the Exide straight bonds were seen at 83 bid, 84 offered and Exide shares fell 11.5%.

In the financial markets overall, equities faltered, and the trend ongoing continued with some rotation, and money coming out of fixed income, and being reallocated to stocks and riskier securities, a convertibles buysider said.

He expects that the market is probably going to correct in the short term. "But it's not going to be a significant correction, likely to be less than 10% and we will buy the dips [in the equity market]," the buysider said.

Convertibles, which are seen at fair value at current levels, will correlate strongly, but there are pockets of undervalued paper, while new deals should hopefully continue, he said.

"The smaller the deals, the cheaper they are; that is generally the case. Anything below $500 million issue size, and down the curve, get more and more interesting," he said.

The cheapness was a function of credit quality, liquidity and also ownership and sponsorship. "Fewer funds will look at the smaller deals. When you have a lot of big funds out there now, they will tend to concentrate their holdings in the more liquid names," he said.

New Microns add

The new Microns added on a hedged basis with the underlying shares trading down 22 cents, or 2.8%, to $7.73. But trading in the new issues was fairly quiet despite the $540 million of new paper in the space.

The upsized Micron issues, which were increased from $440 million, were both well oversubscribed with a lot allocated to existing shareholders. As for the convertibles community allocations, it went to both hedged and outright players.

The allocation profile was pretty typical, a syndicate source said, with a little more than half going to outright investors and a little less than half going to hedged players.

The shares were up 1% on Wednesday after the deal was launched and perpetuated a "pretty good track record" on the stock with debt raises. Shares may have been strong on Wednesday because the company disclosed historical financials on Elpida, its Japanese subsidiary, along with the launch. "This is the first time that they put out that information and it was pretty well received," a syndicate source said.

About $464 million of the face value of Micron's 1.875% convertibles due June 2014 will be taken out with proceeds of the new tranches.

The deals also had a call spread with an upper strike at $14.51, which raised the initial conversion premium from the issuers' perspective to 82.5%, compared to the 37.5% premium from the investors' perspective based on the $10.93 conversion price.

Pricing came through the rich end of talk on the E notes, which was a 1.75% to 2.25% coupon and a 32.5% to 37.5% premium, and at the rich end of talk on the F notes, which was a 2.125% to 2.625% coupon and a 32.5% to 37.5% premium.

Planned Accuray upsizes

Accuray's planned offering of five-year convertible senior notes was upsized during marketing Thursday to $125 million from an initially talked $75 million, according to a market source.

Syndicate sources could not be reached to confirm the upsizing.

The deal was being sold via bookrunner J.P. Morgan Securities LLC, with Goldman Sachs & Co. Inc. as co-manager.

Price talk is for a coupon of 3.25% to 3.75% and a 17.5% to 22.5% initial conversion premium.

Proceeds are intended for working capital and general corporate purposes, including investing strategically in expanding business and new product initiatives.

Sunnyvale, Calif.-based Accuray is a developer of robotic radiosurgery for the treatment of tumors.

The offering implies a credit spread of 1,700 bps over Libor, but one source thinks the credit is stronger than that.

Existing Accuray expands

Accuray's existing 3.75% convertibles due 2016 traded at 90 bid, 90.75 offered versus an underlying share price of $4.50. That was down on an outright basis from 91 bid, 92 offered versus an underlying share price of $5.07 but higher on a delta-neutral, or hedged, basis by 1 point to 1.5 points, according to a buysider.

The existing Accurays trade on about a 45% delta now, the buysider said. "Theoretically, it's lower, but that's where the market trades them."

Exide slips a point outright

Exide's floating-rate convertibles due September 2013 slipped about a point to 94.25 to 94.75. Exide shares fell 37 cents, or 11.5%, to $2.84 in active trade.

The Milton, Ga.-based maker and recycler of batteries beat expectations on revenue while earnings swung to a loss.

The net loss for the fiscal third quarter was $15.4 million, or 20 cents per share, compared to net income of $68.2 million, or 84 cents per share, in the year-earlier period.

Exide reported revenue of $804.9 million, which was higher than the $770.3 million expected by analysts.

Margins were also down. According to the company's release, continued higher spent battery acquisition costs in the Americas combined with lower margins from third-party lead sales negatively impacted gross margin by about $11 million.

Improvement in spent battery acquisition costs in the U.S. began in November 2012, according to the release. The trend has continued into the early part of the fiscal fourth quarter, which should benefit both Americas businesses.

As of Dec. 31, the company had cash and cash equivalents of $80 million and had $81.7 million of availability under its revolving bank credit facility. That's down from $155.4 million of cash as of March 31 and $152.8 million of availability under its revolver.

Mentioned in this article:

Accuray Inc. Nasdaq: ARAY

Exide Technologies Nasdaq: XIDE

Micron Technology Inc. NYSE: MU

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