SanDisk falls after downgrade; iStar lower on bankruptcy rumors; CBIZ bid higher in the gray

By Rebecca Melvin

New York, Sept. 21 - SanDisk Corp. convertibles were lower on a dollar-neutral basis, or "came in," after an analyst's downgrade on the stock Tuesday. The downgrade was based on concern that prices for the memory products that the company makes are coming down.

iStar Financial Inc. convertibles were lower bid, and also traded lower, amid rumors that the New York-based lender may be forced to make a pre-packaged bankruptcy filing as it continues to struggle to repay creditors.

Saks Inc. saw its 2% convertibles due 2024 trade at 94 versus a share price of $8.70 on Tuesday.

Also in trade were Microsoft Corp.'s 0% convertibles due 2013, which traded at 103.5 versus a share price of $25.10, according to a New York-based sellside desk analyst.

Tuesday's action was about even in terms of volume with Monday's session, sources said. Trace volume was up to about $850 million of bonds traded by 4 p.m. ET, which was an improvement on volumes seem through the summer and especially in August.

"It's not awful; not a bad day, especially compared to the summer doldrums," a New York-based trader said of market action. "But it's still not where we were at the beginning of the year."

The so-called light-volume environment affecting convertibles, as well as other asset classes, is being caused by a lack of clarity regarding future direction, the trader said.

"People are not enthusiastic to do much of anything. They are still sitting on their hands because we're not seeing a clear direction in the macro situation," the trader said.

The macro data is inconclusive, the sellsider said, citing Monday's gains on Lennar Corp.'s solid earnings and Tuesday's weaker performance amid better-than-expected housing starts data.

Even the outcome of the Federal Open Market Committee's meeting, in which the Fed expressed its readiness to ease, has a lot of uncertainty about it, the trader said.

The committee left its target interest rate unchanged at 0% to 0.25%, as expected.

Softening amid better supply

There is some concern among convertibles players that softening may occur, or is occurring, in some paper as supply is replenished with new issues, a New York-based sellside trader said.

If supply concerns are relieved, and then some stocks come in on very equity-sensitive names, the convertible bonds sometimes move lower on a dollar-neutral basis compared to the drop in the shares of the same name.

SanDisk was an example. "It came down heavy as shares came off, and if the stock bounces back tomorrow, it's likely to move up on a lighter delta," he said.

"You definitely see situations like that when there's extra selling pressure or just an absence of buyers. It comes down heavy and moves up lighter," the sellsider said.

There was an issue set for pricing in Tuesday's session that was bid 2 points higher in the gray market, but no offer was seen, according to one sellsider.

The issue was CBIZ Inc.'s $100 million offering of five-year convertible senior subordinated notes that was seen pricing on Tuesday after the market close.

SanDisk comes in

SanDisk's 1.5% convertibles due 2017 traded down about 0.5 point to 0.375 point on a dollar-neutral basis, with trades seen down at about 92 from nearly 98.

SanDisk's 1% convertibles due 2013, which trade outright, were down about 0.25 point at 92.25.

Shares of the maker of NAND flash memory products fell $2.29, or 6%, to $35.47 in heavy volume.

Vijay Pakesh, an analyst with Sterne Agee, said in a research report Tuesday that high demand for flash storage will peak in October just before three new fabrication plants are slated to begin production early next year.

SanDisk, whose products are used in electronic devices like digital cameras, benefited from tight supply and higher prices in the first half of 2010.

"It came down pretty heavy," a sellside trader said. Convert players probably hedged it with a low 70s delta and it came down on a 75%.

"It tends to happen especially in a name like this that has gotten richer lately and especially in the convert market," the trader said.

iStar Financial lower

iStar Financial's floating-rate convertibles due 2012 had been 75 plus and were seen down to 73 and also at as low as 70 on Tuesday amid bankruptcy chatter.

"I saw one trade at 73, and they are offered at 74 in the Street," a New York-based sellside trader said.

Another sellsider said his firm traded the paper at 70 versus a share price of $3.45.

Shares of the New York-based commercial real-estate lender plunged more than 20% during the session but pared losses to close down 53 cents, or 13%, at $3.48.

iStar may make a pre-packaged bankruptcy filing after creditors blocked it from amending loans, according to a Bloomberg News report. An upcoming meeting with creditors is expected to discuss potential the terms of a pre-packaged bankruptcy, which may not occur until sometime next year.

iStar asked lenders in August to extend its second-lien term loans due 2011 and 2012 and offered higher spreads on the extended loans.

The company, which has hired firms to advise it on its restructuring, withdrew the proposed revision and has begun the process of planning for a potential bankruptcy as it faces about $2.6 billion in debt coming due.

CBIZ bid plus 2 in gray

The planned $100 million of CBIZ convertibles were bid higher by 2 points in the gray market ahead of expected final pricing Tuesday, but there was no offer seen as of late afternoon, according to one New York-based sellsider.

In addition, price talk for the issue was revised, according to a syndicate source, to 4.75% to 5% for the coupon, which was more aggressive than the 5% to 5.5% coupon originally talked. And talk for the initial conversion premium was tightened to 32.5% to 35% from an originally talked 30% to 35%.

A credit spread of 700 basis points over Libor and a 30% volatility was seen for the Cleveland-based business services provider's issue, according to one sellsider, who said the assumptions were those of the underwriter and he was inclined to agree with them. Nevertheless, there were market players who thought these assumptions were aggressive.

Bank of America Merrill Lynch was the bookrunner of the Rule 144A offering, and KeyBanc Capital Markets and US Bancorp Securities were co-managers.

Proceeds will be used to refinance the company's 3.125% convertibles, which were issued in 2006 and are callable in June 2011.

CBIZ may use funds from the new offering to repurchase some of those notes from time to time and also for general corporate purposes, including repayment of existing balances under its senior credit facility. Up to 25% of the proceeds may be used to repurchase common stock.

Mentioned in this article:

CBIZ Inc. Nasdaq: CBZ

iStar Financial Inc. NYSE: SFI

Microsoft Corp. Nasdaq: MSFT

Saks Inc. NYSE: SKS

SanDisk Corp. Nasdaq: SNDK

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