SanDisk gains outright on stock upgrade; Sepracor falls on probe; Interpublic plans unique deal

By Kenneth Lim

Boston, June 5 - The convertible bond market started the week on a quiet note, with trading focused on a handful of names. But the market got busy after the closing bell, with four deals announced that are expected to price in the next two days.

SanDisk Corp. gained outright in line with its shares in early trading after the stock was upgraded on optimism for the third quarter.

Meanwhile, Sepracor Inc.'s zero-coupon convertible due 2024 declined about 1.25 points outright as the stock slid on reports that the company was under investigation for its stock options granting practices.

The convertible was seen trading at 97 against a stock price of $50 on Monday, while Sepracor stock (Nasdaq: SEPR) fell 4.2% or $2.15 to close at $49.05.

"It came down on the options investigations, we've been getting a number of these lately," a sellsider said.

Marlborough, Mass.-based Sepracor, a pharmaceutical company, said Friday after the market closed that the Securities and Exchange Commission had asked for documents relating to its stock options granting practices. Sepracor said it is cooperating with the SEC and has set up a special committee on to review its stock options practices.

Level 3 Communications Inc.'s 2.875% convertible due 2010 slid about one point to end at 91.25 versus a stock price of $4.70 in line with a sharp drop in the stock after the company said it was buying a privately held company for $96 million in stock and cash.

Level 3 stock (Nasdaq: LVLT) ended Monday at $4.69, down by 6.57% or 33 cents.

Broomfield, Colo.-based Level 3 said Monday that it will buy Oak Brook, Ill.-based Looking Glass Networks, a provider of fiber optic networks, with $87 million in shares and $9 million in cash. It will also pay liabilities of about $69 million. Level 3 is an internet network backbone services provider.

SanDisk up on stock upgrade

SanDisk's old 1% convertible due 2013 gained as much as three points on an outright basis on Monday after the stock rose in early trading after an upgrade by Bear Stearns.

The convertible traded at 94.25 late Monday against the closing stock price of $54.20. SanDisk stock rose as high as $57.08, but fell in afternoon trading to close down by 1.69% or 93 cents.

"Now it's [the stock] trading on NAND prices, or expectations of NAND prices," a buy-side convertible bond analyst said.

Bear Stearns equity analyst Gurinder Kalra upgraded SanDisk stock to outperform from peer perform on Monday, citing "a more benign pricing environment in the third quarter."

The market for flash memory products, which SanDisk makes, could reach an undersupply situation in the second half of the year, while Wall Street analysts may start to raise earnings targets, Kalra said.

But a sell-side convertible bond analyst said nothing has happened recently that would change his opinion from about a month ago on the compan's credit. "I kind of looked at it as a weak BB ish kind of name," the analyst said.

"There are a couple of issues in the product portfolio, there's a lot of competition there, and there's a fair amount of leverage there that you don't see," the analyst said. "It makes the story a little more complicated."

The buy-side analyst said there also continues to be concern about rising inventories at SanDisk, which could mean that the company overproduced

"Only time will tell which one is right," the analyst said.

Interpublic's $500 million deal has new structure

Interpublic Group of Cos. Inc. on Monday announced a $500 million convertible offering of three-year floating rate senior note-and-warrant units through a special purpose vehicle, in what market sources said was an interesting structure.

Under the deal, which is expected to price by Wednesday, Interpublic unit ELF Special Financing Ltd. will issue two tranches of notes of $100,000 apiece linked to Interpublic credit and attach to each note warrants exchangeable into Interpublic shares.

The A series of notes are talked at a coupon of 3-month Libor plus 135 basis points to 3-month Libor plus 185 bps, while the A series of capped warrants will have an initial conversion premium of 10% to between 35% and 45%.

The B series of notes are talked at a coupon of 3-month Libor plus 10 bps to 3-month Libor plus 60 bps, while the B tranche uncapped warrants will have an initial conversion premium of 27.5% to 32.5%.

The size of each tranche will be determined at pricing. There is an over-allotment option for a further $75 million.

Morgan Stanley, UBS Investment Group, Citigroup and JP Morgan are the bookrunners of the Rule 144A and 3(c)(7) unregistered offering.

"This Interpublic deal is a new structure," a buysider said, noting that the bookrunners had arranged a conference call to explain the structure.

Interpublic, a New York-based advertising and marketing group, is using the deal to replace its existing three-year revolving stand-by loan. Upon the closing of the note-and-warrants deal, ELF will be obligated to make cash advances to Interpublic and issue letters of credit to Interpublic. Interpublic said the transaction will not increase its consolidated debt until its starts to borrow under the credit agreement with ELF or incurs a letter of credit reimbursement obligation.

Interpublic shares (NYSE: IPG) closed at $9.53 on Monday, down by 1.45% or 14 cents.

Spansion, Charles River plans deals

Spansion Inc. also plans to sell $240 million of 10-year senior subordinated exchangeable debentures, talked at a coupon of 2% to 2.5% and an initial conversion premium of 17.5% to 22.5%.

Pricing is expected Tuesday after the market closes. There is an over-allotment option for a further $35 million.

Citigroup and Credit Suisse are the bookrunners of the Rule 144A deal which will be issued through Spansion's operating subsidiary Spansion LLC.

Spansion, a Sunnyvale, Calif.-based maker of flash memory products, said it will use the proceeds of the offering to repay its entire outstanding 12.75% senior subordinated notes due 2016 and for capital expenditures, working capital and other general corporate purposes.

Spansion shares (Nasdaq: SPSN) slid 2.5% or 43 cents to end at $16.76 on Monday.

Charles River Laboratories International Inc.'s $300 million offering of seven-year convertible senior notes is also expected to price Tuesday after the market closes.

Price talk is for a coupon of 2% to 2.5% and an initial conversion premium of 22.5% to 27.5%.

There is an over-allotment option for a further $50 million.

JP Morgan and Credit Suisse are the bookrunners of the Rule 144A offering.

Charles River said it will use the proceeds to buy back $125 million of its common stock from purchasers of the notes and to pay for convertible note hedge and warrant transactions. The remaining proceeds will be used for general corporate purposes, including buying back shares from the open market.

Charles River stock (NYSE: CRL) slid 1.29% or 52 cents to end at $39.86 on Monday.

International Rectifier deal to price Wednesday

International Rectifier Corp. also has a deal in the pipeline, with its $650 million of seven-year convertible subordinated notes expected to price Wednesday after the market closes

Price talk guides for a coupon of 0.75% to 1.25% and an initial conversion premium of 15% to 20%. There is a greenshoe option for a further $100 million.

JP Morgan, Lehman Brothers, Credit Suisse, Deutsche Bank and Goldman Sachs are the bookrunners of the Rule 144A offering.

International Rectifier, an El Segundo, Calif.-based maker of power management semiconductor products, said the proceeds of the deal will be used for general corporate purposes and to pay for convertible note hedge and warrant transactions.

International Rectifier shares (NYSE: IRF) closed at $43.46, down by 3.74% or $1.69.

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