SanDisk falls on dropped bid; Transocean eases on lower oil prices; Prudential, Omnicom firm

By Rebecca Melvin

New York, Oct. 22 - Convertibles were weaker overall Wednesday as stocks suffered a sharp sell-off that sent the S&P 500 and Nasdaq stock markets to five-year lows.

SanDisk Corp. plunged to below the 50 mark on news that Samsung Electronics Co. dropped its bid to buy out the Milpitas, Calif.-based maker of flash memory components.

"Another nasty day," a New York-based sellsider noted.

New York-based Vornado Realty Trust and Denver-based ProLogis, a pair of real-estate-investment trusts, were in trade, and moved lower Wednesday.

Transocean Inc., a market bellwether, traded in significant volume, but didn't fall as steeply as their underlying shares, which dropped 12.6%, spurred by a tumble in crude oil prices.

Both the Dow Jones Industrial Average and S&P 500 ended down 6%, with the DJIA sinking in the final hour of the session by 689 points, before finishing off its lows, down 514 points at 8,519.

The S&P 500 closed down 58 points, or 6%, to 896.78, and the Nasdaq ended down 80 points, or 5%, at 1,615.75.

A few shorter-dated convertibles issues continued to firm and stabilize, however.

Prudential Financial Inc. saw its floating-rate convertibles, putable in December, firmer. And Omnicom Group, Inc., a New York-based advertising and marketing services company, saw its convertibles, which are putable in February, trade at 96.25.

In financials, Sovereign Bancorp Inc. 4.375% convertible preferreds traded at 18 bid, 20 offered, compared to a previous level at 14.5. But that was lower than the spike to 25 last week on news Spain's Banco Santander plans to buy out the rest of the Pennsylvania-based savings and loan.

Wachovia Corp., which reported a huge $23.9 billion third-quarter loss before the open, was little changed.

Selling pressure continues

Selling pressure continues to be a fact of life in the convertible market these days, as investors liquidate positions by force or by choice, traders said. But with valuations so cheap, many are wondering when money will flow back in to the market.

"I qualify as an old timer. Pricing today has been driven by liquidity. By that, I mean the act of everyone seeking liquidity at the same time has driven pricing to levels we now have," said Mark Henriquez, director of convertibles trading at Kellogg Partners Institutional Services.

"These levels are probably only mirrored in the 1979-82 time period when Fed funds were double digits. That was inflation related, and while this is credit driven, it is indistinguishable to those [pricing] levels," Henriquez said.

"There was not enough hedging going on at that time to make that correlation, but converts performed quite well, as did other asset classes, in the following years," he explained.

"It's important to recall too that during that time period, we were coming out of the REIT implosion. Many reorganized, others, which were trading as though they might have to file Chapter 11, never missed a payment and wound up being great purchases. Of course, one never knew if they would succeed or not, which is also remarkably like the quandary we find ourselves in now on a more generalized basis," Henriquez said.

SanDisk tumbles as bid evaporates

SanDisk's 1% convertible senior notes due 2013 traded at 49 bid, 50 offered intra-session, and were indicated to close at about 44, versus a share price of $10.09.

On Monday, the 1% convertibles were at 68 bid, 69 offered, versus $14.42.

Shares of the Milpitas, Calif.-based chipmaker fell 32% after Samsung Electronics dropped a buyout bid that SanDisk repeatedly called too low.

Samsung was willing to pay $26.00 per share, which valued the company at $5.85 billion.

In a letter to SanDisk's board, Samsung chief executive Yoon Woo Lee said that in addition to not agreeing on a price, there were "growing uncertainties" in SanDisk's business that may "deteriorate in this difficult economic environment."

A supply glut has depressed prices for SanDisk's NAND flash memory cards.

Still Samsung suggested it may be interested in buying SanDisk for a lower price.

Citi Investment Research analyst Craig A. Ellis said Samsung's action leaves SanDisk's shares vulnerable to "abysmal" industry conditions.

Since July 22, when Samsung made the offer, the price of NAND memory chips used in digital devices like cameras and music players has dropped 40%, Ellis said.

On Monday, SanDisk posted a third-quarter loss of $155 million due to low pricing on excess inventory. The company's per-share loss was well below Wall Street's expectations, though revenue was above estimates.

Vornado, ProLogis lower

Vornado's 2.85% convertibles due 2027 traded at 63.50, versus a stock price of $62.25 on Wednesday. The Vornado 2.85s were indicated to close lower at 62, versus $60.64, compared to 64.5 on Tuesday. Shares of Vornado closed down 5%.

ProLogis' 1.875% convertibles due 2037 traded at 43.75, compared to a previous indicated value of 48. Its shares fell 13% to $16.27 on Wednesday.

Transocean weaker as oil falls

Crude oil for December delivery declined $5.43, or 7.5%, to $66.75 a barrel on the New York Mercantile Exchange, the lowest settlement since June 13, 2007.

Transocean's 1.625% series A convertibles due 2037 traded at 84 versus a share price of $68.50 during the session.

Shares of the Houston-based offshore oil-services company closed at $68.88, or 13%.

Prudential firmer

"With the passing of the CFC paper, which was perceived as the riskiest thing in the market, there is more of an appetite of shorter-end paper," a New York-based sellside trader said, referring to the Countrywide Financial floating-rate convertibles that were redeemable this month.

"The PRUs have been firmer and more stable. They had been moving 2 to 3 points a day. It was making people want to vomit, watching it go from 98 to 90, and 89," he said.

The Prudential Libor minus 240 basis points convertibles due 2036 were indicated to close at 95.88, versus a share price of $33.75, compared to 94.8 versus a share price of $37.96 on Tuesday.

The Newark, N.J.-based insurance company saw its shares drop $4.21, or 11%.

Mentioned in this article:

SanDisk Corp. Nasdaq: SNDK

Vornado Realty Trust NYSE: VNO

ProLogis NYSE: PLD

Transocean Inc. NYSE: RIG

Omnicom Inc. NYSE: OMC

Prudential Financial Inc. NYSE: PRU

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