Hercules Offshore jumps outright on news of asset purchases; Micron, new Hutchinson gain

By Rebecca Melvin

New York, Feb. 14 - Hercules Offshore Inc.'s convertibles jumped 5 points outright in active trade on Monday as the Houston-based oil-services company's underlying shares surged on news that it's buying assets owned by Seahawk Drilling for $105 million.

The energy name was seen as perhaps the most interesting name in an otherwise quiet Valentine's Day market, sources said.

Elsewhere, Micron Inc.'s convertibles traded higher, but mostly in line with the underlying shares, after ratings and price targets on the Boise, Idaho-based chip maker were raised by several analysts, stemming from an analysts' day on Friday, a sellsider said.

Also in the tech space, Hutchinson Technology Inc. saw its $40 million of newly minted 8.5% convertibles due 2026 trade higher to 88 bid, 89 offered on Monday from 83 bid, 84 offered when the paper was first issued last week in exchange for an existing 3.25% convertibles issue due 2026.

Hutchinson is based in Hutchinson, Minn., and makes suspension assemblies for disk drives.

NetApp Inc.'s convertibles were also bid higher, a New York-based sellside trader said, despite lower underlying shares for the Sunnyvale, Calif., data storage company, which slipped during the session in low volume.

In the primary market, Prospect Capital Corp. priced $150 million of 5.5-year convertible senior notes to yield 5.5% with an initial conversion premium of 10%.

Also in the primary internationally, Credit Suisse Group AG said it was issuing $3.5 billion and CHF 2.5 billion of contingent convertibles, which although different in structure from what are known as contingent convertibles in the United States, were seen, nevertheless, as potentially interesting to convertible investors, who might find ways to hedge the downside risk while capturing the high yields.

The new Credit Suisse contingent convertibles, which will bear interest at 9.5% and 9%, respectively, and are being sold to only two investors, Qatar Holding and the Olayan Group, can be converted into equity only in the event of a decline in the bank's Tier 1 capital ratio to less than 7%.

"Convertible investors would be much more interested in cocos that allow conversion into shares on the upside as well, rather than just on the downside, in other words, if the capital ratio drops below a certain trigger," a London-based sellside analyst said.

"But, we and convertible investors are interested to see today's announcement. It's another step in the development of this very nascent but potentially very large asset class. With the right structure [in particular] with a conversion option for holders, timing, name and as ever pricing, we think cocos and convertibles can be mutually beneficial," the sellside analyst said.

Overall, Monday's convertibles session was quiet, with the broader markets also rather dull in the aftermath of the regime change in Egypt and with no major economic data on the calendar.

Hercules powers up

Hercules Offshore's 3.375% convertibles due 2038 traded up to 91.5 bid, 92 offered on Monday, which was up 4 or 5 points from a previous level of 87 bid, 88 offered.

Shares of the Houston-based oil services company surged more than 20% in the pre-market and ended the trading session up 65 cents, or 18%, at $4.27.

Hercules said it would buy the assets of Seahawk Drilling for $105 million. Seahawk was hurt by the slowdown in offshore drilling following the Gulf of Mexico oil spill and said it had filed for bankruptcy protection on Friday.

Hercules was "interesting" with the company buying Seakawk Drilling assets, a New York-based sellside trader said.

"The market loved [the] deal from Hercules' perspective. With Hercules stock north of $4, I would think there's an excellent chance Hercules looks to refinance its converts and raise new funds in the very near future, suggesting more upside in the bonds," the sellsider said.

Following the acquisition, Hercules will own about 40% of the shallow-water jack-up rigs in the Gulf and about half of the jack-ups that are currently active in the region, according to reports.

Micron flat dollar neutral

Micron Technology's 1.875% convertibles due 2014 were called 107.75 versus a share price of $11.65 at the end of the session. That was up on an outright basis and "in line," or flat, on a dollar-neutral basis with the underlying shares, a sellside trader said.

A second Micron issue, a 1.875% convertible due 2027, was seen at 122.4 bid, compared to 120.5 bid last.

Shares of the semiconductor device maker ended higher by 33 cents, or nearly 3%, at $11.65 on Monday in heavy volume.

ThinkEquity upped its Micron numbers, with estimates boosted through 2012. ThinkEquity said the Boise, Idaho-based semiconductor company should benefit from strong end-market demand, and it put a "buy" rating on the company and set a new $15.00 stock price target.

The convertibles traded up dollar neutral on swap," a sellsider said. "It was not that exciting."

The analysts' day had prompted raised price targets and ratings, and the trading was based on that, he said.

The bonds were level to higher by 0.125 point to 0.25 point, he added.

New Hutchinson jumps

Hutchinson Technology's 8.5% convertibles due 2026 traded Monday, the first day the bonds were being recorded by trace data, at 88 bid, 89 offered. The previous level on the bonds, which were issued last week as part of an exchange, were seen at 83 bid, 84 offered and even as low as 82.

"Eighty-nine seems like the right level," a sellsider said. "That's what they are worth."

The older Hutchinson 3.25% convertibles due 2026 have been a little higher subsequent to the exchange, trading up at 82.5, from 81 bid, 82 offered prior to the exchange, the sellsider said.

"They traded in line, up 0.25 point to 0.5 point," following the exchange, the sellsider said.

The exchange, which was part of a partial tender, was oversubscribed, the sellsider said.

Mentioned in this article:

Credit Suisse Group AG NYSE: CS

Hercules Offshore Inc. Nasdaq: HERO

Hutchinson Technology Inc. Nasdaq: HTCH

Micron Inc. NYSE: MU

NetApp Inc. Nasdaq: NTAP

Prospect Capital Corp. Nasdaq: PSEC

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