AMD warning crushes chip paper; Finisar, Infineon both easier, too, on sale collapse

By Ronda Fears

Nashville, Jan.11 - Convertibles in the chip sector were slammed by the warning from Advanced Micro Devices Inc., crushing issues of others in the sector like Micron Technology Inc., Cypress Semiconductor Corp., Credence Systems Corp., Kulicke & Soffa Industries Inc. and Amkor Technology Inc.

Outright holders of the chip paper, at least, were trampled but convertible arbitrageurs were basically unscathed by the event and in most cases were making money on the slide in those stocks.

Traders noted, too, that all those chip stocks were higher in after-hours trading on Intel Corp.'s release of fourth quarter earnings after the closing bell. Intel, AMD's biggest direct competitor in the computer chip area, gave a slightly higher than expected outlook for first quarter sales. Conversely, AMD warned that its results due to be reported next Tuesday would likely fall below Wall Street's expectations.

"AMD was slaughtered, and just about all the rest of the chips were crushed in the aftermath" of AMD's warning, a dealer said. "We'll probably see a little of a bounce-back because of Intel, maybe some buying on a perception that the reaction was a bit overdone, but I'm not looking for anything big."

Two other chip names were active - Finisar Corp. and Infineon Technologies AG - both easing after the breakdown of the sale of Infineon's fiber optics unit to Finisar for $206 million of stock, according to the latest negotiations. Finisar had been holding up on the news, however, until it succumbed to the general pressure in the chip sector, traders said.

Generally, the convertible market tracked the broader markets lower but there were a handful of names in positive territory, like Nortel Networks Corp., which gained by virtue of the lack of any more bad news or surprises from its outside audit.

"Earnings are not boding well for the start of 2005, and I think we're seeing the impact in converts in terms of new deals - the non-existence of any new deals, that is," said a capital markets source.

AMD warning crushes chips

AMD said after the bell on Monday that fourth-quarter operating income is anticipated to be positive, but down significantly from the third-quarter total of $68.4 million and, more disappointing to analysts, it warned that sales for the quarter ended Dec. 26 would gain just "slightly" from the $1.24 billion posted in the previous quarter.

Analysts had been looking for sales in the neighborhood of $1.35 billion, on average.

AMD's 4.5% convertibles due 2007, which are deep in the money, dropped sharply in outright points but just about 1 point on swap to 8 points over parity, traders said. The 4.75% convert due 2022, which becomes callable next month at 102.375, dropped 8 to 10 points outright to 100.5 bid, 100.875 offered.

AMD stock plummeted more than 26% on the day, ending down by $5.27 at $14.86.

The foremost concern is that AMD won't be able to sustain gains it made last year against Intel in the market for memory chips and chips for internet servers, or in fact see some slippage, a buyside analyst said. Because of that, he said, "the Intel news may be good for the chip sector overall, but not AMD."

AMD is set to report results after the market close on Tuesday, Jan. 18.

Finisar caves on chip worries

German based chipmaker Infineon Technologies AG on Tuesday scrubbed talks to sell its fiber optic assets to Finisar Corp. and was holding up pretty well on that news, traders said, until the AMD wave dragged its converts lower with the pack of semiconductor issues.

Finisar's 2.5% convertible ended Tuesday off by 2 points at 87 bid, 88 offered and the 5.25% convert dropped 0.25 point to 98 bid, 99 offered, as the stock lost 16 cents, or 8.56%, to close at $1.71.

On the news, Infineon's euro convertibles were easier but analysts said they expect some positive movement from the volatility spike created by the upset. Infineon and Finisar had agreed to the transaction in April 2004 and have been haggling over a price ever since, with Infineon withdrawing from talks Tuesday.

As an alternative to the sale, Infineon said it would begin restructuring its fiber optics business, which analysts expect to result in major job cuts and expenses. Being left with the challenge of turning the unit around after it has been a drag on profits for four years was a negative turn of events for Infineon.

Infineon credit spreads widened on the news, and the 5% convertible dropped 1 point to 112.375 bid, 113 offered. The 4.25% convert traded sideways at 101.875 bid, 102.25 offered, a trader in London said. Infineon shares closed down €0.25, or 3.14%, to €7.71 on the XETRA and lower by 31 cents, or 3%, to $10.04 in the United States.

Nortel converts add 0.25 point

There were no surprises in the Nortel audit, nor any more bad news, which translated to good news for the Canada-based telecom. As a result, it was one of the few gainers on convertible screens Tuesday as earnings worries escalated in the early showings of this earnings season.

Nortel's 4.25% convert due 2008 gained 0.25 point to 97.5 bid, 97.625 offered with the stock up 14 cents on the day, or 4.19%, to $3.48.

As previously projected, Nortel said the outside review of its books, conducted by the law firm Wilmer Cutler Pickering Hale and Dorr, found that lax internal controls and improper behavior by former executives led to the misstated financial results over the past few years. As expected, the company restated earnings through 2003, but no time has been established to report 2004 results.

Nortel replaced its top executives months ago, but also said on Tuesday that to avoid future problems it hired a chief ethics officer and will institute a series of checks and balances to improve how it accounts for earnings. Also, the company announced that 12 senior executives - none of whom bear responsibility for the accounting scandal - will return $8.6 million in bonuses given under a 2002 plan to reward employees for returning Nortel to profitability. In addition, Nortel said five board members would not stand for re-election.

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