Micron trades around par; Powerwave prices; Horsehead on tap; InterDigital jumps on rumor

By Rebecca Melvin

New York, July 21 - Micron Technology Inc.'s newly priced 1.5% convertibles traded right around par on their debut in the secondary market on Thursday, while Micron's 1.875% tranche B convertible slipped below par to trade at 99.25 on their first day trading, market sources said.

Micron's existing convertibles traded mostly flat on Thursday.

Micron priced $600 million of paper in two, $300 million tranches at the rich end of talked terms late Wednesday.

Also in primary market action, Powerwave Technologies Inc. priced $100 million of 30-year convertible senior subordinated notes to yield 2.75% in a Rule 144A deal that came via bookrunner Lazard Capital Markets LLC.

The new Powerwave has an accretion provision under which the bond gets an extra 5% per year, but the accreted principal will not bear interest and will not be convertible.

"There's no [convertible] paper out there like this," a New York-based sellside trader said.

The unusual Powerwave structure coming on the heels of Micron's mismatched calls and puts caused some eyebrow raising among market players.

"I will say this about new issues: having different features such as call protection, screw clause on conversion, stuff like that only makes it more difficult. A nice homogenous universe, at least to some basic stuff, makes a very difficult product a little easier," a trader said.

But he said the reason for these features cropping up is that supply is still very constrained. "Buyers have little to no leverage. It's a seller's market."

He said that if every issue that comes along is different in terms of provisions, "then it's just another annoying step." But for now, he didn't see any reason why there would be pressure to maintain investor-oriented standards. For now, buyers are just "going to grin and take it," he said.

Horsehead Holding Corp. was on tap for pricing late Thursday after the Pittsburgh-based specialty zinc producer launched an $80 million offering of six-year convertibles late Wednesday via Stifel Nicolaus & Co. Inc.

Elsewhere, InterDigital Inc.'s convertibles jumped outright and moved in line on a hedged basis amid rumors that Google Inc. has held talks to buy patents belonging to the wireless chip technology company.

Alliance Data Systems Corp.'s convertibles were in trade also, but lower along with lower underlying shares.

New Micron around par

Micron's newly priced 1.5% A tranche convertibles due 2031 traded right around par, or at 100 versus an underlying share price of $7.60 during Thursday's session.

Micron's new 1.875% B tranche due 2031 also traded around par but was reported trading below par at 99.25 as well.

Shares of the Boise, Idaho-based semiconductor device maker dipped in early trade but recovered losses to end up 5 cents, or 0.6%, at $7.64.

Micron's existing 1.875% convertibles due 2014 traded flat 97.25.

Structure affects pricing

The tempered price moves in the Micron convertibles and stock were viewed as a function of the pricing and structure on the new convertibles, which weren't received enthusiastically.

The Micron As are call protected for just two years, then provisionally callable for two years subject to a 130% price hurdle. In contrast, investors have a put out in year seven.

The Micron B paper is non-callable for three years, then provisionally callable for two years subject to a 130% price hurdle, and there is a holder put at nine years.

Both issues priced at the rich end of terms. Tranche A was talked to yield 1.5% to 2%, while tranche B was talked to yield 1.875% to 2.375%. Both tranches were seen with a 20% to 25% initial conversion premium.

There is a $45 million greenshoe for each tranche.

The deal was what is known as "a happy meal," in which a portion of the proceeds was earmarked for repurchasing common stock under a $150 million stock repurchase program.

Remaining proceeds were for general corporate purposes, including working capital, capital expenditures, and potential acquisitions and strategic transactions, and to cover the expense of a capped-call spread.

The capped call transactions each have a lower strike price of $9.50, and capped prices ranging from $11.40 to $13.17, which are 50% to 73.3% higher than the closing price of Micron's common stock on July 20.

The bonds priced relative to one another, so it wasn't expected that investors would favor one tranche over the other. The longer-dated paper has a slightly higher coupon to compensate for the extra time.

The structure is "a little bit different than people are used to and that's throwing people off a little bit, but longer term they should do fine," a Chicago-based sellside trader said Wednesday before final terms were fixed.

A second trader, this one from New York, said that hedge players would have trouble with the cost of carry related to shorting the shares.

"Hedgies are going to have trouble carrying it profitably, and a lot of proceeds were going to buy back stock, further levering up the company, which makes people less than happy," the trader said.

Micron is a memory chip maker that's considered a commodity player in which pricing declines coincide with constant need for new developments in chips, a New York-based sellside trader noted.

"The mismatch between the call and the put, and the fact that it's long dated for a pretty levered company in the commodity business [are hurdles]," he said. "That's a lot of risk people are being asked to take; and they are not being compensated with income. For hedgies to carry this, maybe they are going to get single-digit returns on the carry, compared to double that in other names, even in this environment," the trader said.

Powerwave structure eyed

Powerwave's newly priced 2.75% convertibles traded late in the session Thursday between 102.5 bid, 104 offered, versus the common, which was higher, a syndicate source said.

Shares of the Santa Ana, Calif.-based wireless networks solutions company settled at $2.34, which was up 5%.

"They traded up on an outright basis," a syndicate source said.

Powerwave's existing 1.875% convertibles, of which a portion is being bought back with proceeds of the new deal, traded at 100.375 a few times, a New York-based trader said.

Powerwave's 3.875% convertibles due 2027 weren't seen in trade.

The 5% extra on the bond that's going to accrete every year at the end of the year, translating into a compounded amount of $1,050 for a $1,000 bond, will not bear interest, nor will it be convertible.

"It's basically an IOU from the company. I guess when you put it back, that's when you get that money. It's not going to be an easy piece of paper," the trader said.

"Honestly, I don't even know how guys are going to trade that," he said.

Powerwave priced $100 million of 30-year convertible senior subordinated notes to yield 2.75%. They will be convertible at about $3.12 per share, and they have contingent conversion subject to shares being 130% of the conversion price for at least 20 out of 30 trading days.

Holders may put the notes on July 15, 2018, July 15, 2025 and July 15, 2032 at par plus interest.

Proceeds will be used to repurchase $42.6 million of Powerwave's existing 1.875% convertibles due 2024, leaving just $15.3 million of that issue outstanding. Proceeds will also be used to buy back about $25 million, or 11.2 million, common shares. Remaining proceeds will be used to repurchase additional debt and for general corporate and working capital purposes.

InterDigital moves up in line

InterDigital's 2.5% convertibles due 2016 traded at 149 versus an underlying share price of $79.00 on Thursday, compared to 133.75 versus an underlying share price of $68.65 on Wednesday, according to a New York-based sellside desk analyst.

The points of premium over parity contracted to about 11 points from about 14 points, which was what it was supposed to do with shares on the move up, sources said.

"They moved up in line," a New York-based trader said.

Shares of the King of Prussia, Pa.-based wireless chip technology company closed off their highs, but still up $5.60, or 8%, to $74.27 on the day in very active trade.

Driving the move were reports that search giant Google, which lost out on the huge Nortel Networks bankruptcy patent deal, is in a hurry to broaden its patent portfolio and has held talks with InterDigital.

Mentioned in this article

Horsehead Holding Corp. Nasdaq: ZINC

InterDigital Inc. Nasdaq: IDCC

Micron Technology Inc. NYSE: MU

Powerwave Technologies Inc. Nasdaq: PWAV

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