EMC, NetApp under pressure; SunPower better on earnings; A&P steady; Petrominerales prices

By Rebecca Melvin

New York, Aug. 12 - The convertible bond market remained under pressure for a second consecutive day as equities sagged again amid more weak indications for economic recovery.

Volume was a little better than at the beginning of the week and breadth was better.

But disappointing earnings from Cisco Systems Inc. weighted on technology names, helping push EMC Corp. to the top of the volume chart for convertibles trading. And NetApp Inc. was also near the top.

"EMC and Transocean [Ltd.] were the two single largest volume names, accounting for about 30% of the day's volume," a New York-based trader said toward the end of the session.

NetApp's 1.75% convertibles due 2013 traded down 7 to 8 points at 130.334, while shares of the Sunnyvale, Calif.-based data management company fell 8.7%.

Sellers of high-yield and distressed paper in the general debt markets continued for a second day but at a more moderate pace, another sellsider said.

"On Wednesday, there were sellers in high yield and people leaving the distressed market. It got smoked lower, but today it's more moderately lower; not the frenzy of yesterday," the New York-based sellsider said.

SunPower Corp. bucked the general trend, however, and moved up in fairly active trade, after enjoying an up day Wednesday. The U.S. solar power company reported earnings earlier in the week.

Great Atlantic & Pacific Tea Co. was also in trade, and holding up compared to where the paper had been, amid no particular news in the name, a sellsider said.

Qwest Communications International Inc.'s 3.5% convertibles were in trade as the tender offer for that paper was expiring.

Merck & Co. Inc.'s 6% mandatory preferred convertibles were set to be converted Friday, but those shares - formerly Schering-Plough's - weren't heard in trade.

In the primary market, Petrominerales Ltd. priced an upsized $550 million of six-year convertible bonds to yield 2.625% with an initial conversion premium of 35% above the volume weighted average price of shares trading on the Toronto Stock Exchange between Aug. 10 and Aug. 12, according to a syndicate source Thursday.

The VWAP over the three days was C$26.8002, and the conversion price, set in U.S. dollars, is $34.7464.

A gray market in the Rule 144A and Regulation S Petrominerales deal wasn't heard.

SunPower rekindling

SunPower's 1.25% convertibles due 2027 were active at 91 and 91.50 on Thursday, compared to 91 on Wednesday, which was higher on the day.

At the end of May the Sunpower 1.25% convertibles were in the low 80s.

The paper trades outright, generally.

Shares of the San Jose, Calif.-based solar panel maker were unchanged on the day at $12.30.

"SunPower bounced off the lows and is edging up," a sellsider said. "It took such a drastic leg down three or four months ago and died there, but now is coming back."

The company raised its earnings guidance for the full year and beat expectations when it reported second-quarter earnings Tuesday.

SunPower shares remain down close to 50% this year and have received no significant earnings rally.

The company's earnings report is a notoriously difficult one for analysts when it comes to measuring performance.

Several analysts noted that SunPower's balance sheet improved, yet the improvement was largely driven by its previously announced joint venture with AU Optronics.

The company expects 2010 spending to decrease to $150 million to $200 million, from $375 million to $475 million, because of the AU Optronics deal.

SunPower also increased its sales of straight modules outside of its captive systems business in the quarter, and as it generates more revenue from the utility project business, the strong balance sheet will become an even more important factor to monitor.

Even though SunPower fell short of the Street mark in revenue for the quarter, Adam Krop, analyst at Ardour Capital, said that SunPower has turned the corner in terms of revenue expectations due to its pipeline.

A&P active, steady

A&P's 5.125% convertibles due 2011 were 70.5 and 72 on Thursday, according to one sellsider. A second sellsider put the paper at 70.5 bid, 71.5 offered.

The level was pretty steady compared to moves the paper has made of late. It recently plunged 30 points to 64.25 and then was 66 bid, 69 offered.

A&P's 6.75% convertibles due 2012 traded once at 52 on Thursday, according to the first sellsider, and 52 bid, 53 offered, according to the second source. That paper had been recently 40 bid, 42.5 offered.

"It's not really changed. And there was no news that I know of in the last couple of days. It's a name a lot of people started to pay attention to after that last drop," a New York-based sellsider said.

Shares of the Montvale, N.J.-based grocery store chain ended down a penny at $3.05 on Thursday.

Qwest tender expires

Qwest's 3.5% convertibles due 2025 traded at 117.25 with the tender expiration, one sellsider said. Trace reported a late trade at 116.856, which was down 0.6 point on the day.

Qwest offered to purchase for cash any and all of its $1.265 billion outstanding 3.5% convertible senior notes on July 13.

The Denver-based communications company was offering to pay, in cash, for each $1,000 principal amount of convertibles, a fixed cash amount of $1,170, which was the maximum consideration payable in the offer. Accrued interest to, but excluding the settlement date, was also paid.

Merck to convert 6% preferreds

The Merck 6% mandatory convertible preferreds were 248.5 bid, 249 offered on Thursday, the day ahead of their being converted Friday.

There was only about $214 million of the mandatories still outstanding ($250 par value times 854,000 shares), compared to the original issue of 10 million shares, or about $2.5 billion, a New York-based sellside desk analyst said.

For each share of preferred stock, holders will receive $85.06 in cash ($10.50 times a cash conversion rate of 8.1011) and 4.6719 shares of Merck common stock (0.5767 of a share times a share conversion rate of 8.1011).

The applicable market value used to calculate the cash conversion rate and the share conversion rate was $30.86, equal to the sum of (a) $10.50, plus (b) $20.36 (the result obtained by multiplying $35.31, the average of the closing prices for the shares of Merck common stock over the 20 consecutive trading days ending on Aug. 10, by 0.5767).

Mentioned in this article:

EMC Corp. NYSE: EMC

Great Atlantic & Pacific Tea Co. NYSE: GAP

Merck & Co. Inc. NYSE: MRK

NetApp Inc. Nasdaq: NTAP

Petrominerales Ltd. Toronto: PMG

Qwest Communications International Inc. NYSE: Q

SunPower Corp. Nasdaq: SPWRA

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