Convertibles firm slightly; SanDisk holds in dollar neutral; EMC drags at lows; Kodak up

By Rebecca Melvin

New York, Jan. 29 - The convertible market was slightly firmer Friday, concluding a week that was marked by significant selling pressure related to redemptions and weakness in the broader markets, sources said.

No new issuance came to market in the primary arena, although market players didn't foresee a pullback in primary issuance so much as a quiet period inspired by earnings season.

When the primary market picks back up, sources said they expect a resumption of recent trends, including issuers in sectors like real estate investment trusts and companies needing refinancing and simultaneous equity and convertible offerings.

New issue pricing is expected to continue to reflect an investor pool that is about 50% hedge funds and 50% outright investors. Outright investors look for equity upside and don't want high premiums, a New York-based syndicate source said.

Among top movers in the convertibles market Friday was SanDisk Corp. The convertibles of the flash memory producer came down on a 25% delta amid a slide in their underlying shares, but they held in on a dollar neutral basis, a New York-based sellside trader said.

EMC Corp. was dragging along at recent lows Friday with its underlying shares off a couple of percentage points. The EMC paper dropped Monday amid a small sell-off in the underlying shares ahead of earnings Tuesday and after large sales from Citadel Investment Group.

Eastman Kodak Co. convertibles also recovered some ground Friday. The paper slid on Thursday when their underlying stock zoomed up in heavy volume but the convert failed to keep pace. The digital photography company had reported a fourth-quarter profit on higher revenue.

Overall the market saw some month-end activity that boosted trades, but there were only pockets of activity.

Going into February, one sellsider said it didn't look like much was going to change.

"It's month end, so people are going to size up their books. Maybe it's time to reassess. It's not going to be a good January for a lot of guys," the New York-based sellsider said.

But there were some buyers responding to the "flood of supply" and the fact that some stuff got a little cheap, the sellsider said. "And it was a little firmer today, but not a drastic change."

New issues stall

New issuance stalled out this week, but for the month there was $1.84 billion of new issuance in the U.S. convertibles market, coming in six deals.

"It was pretty anemic," one sellsider said. "Most people anticipated that there would have been a lot of new issuance, but it's been fairly quiet and weak this month."

More stability will cause equity-linked issuance to pick up," a New York-based syndicate source said. "Right now, the backdrop of what the government is going to do is a question mark."

New deals in January included a $750 million issue from PetroBakken Energy Ltd. on Jan. 8, accounting for 41% of total issuance for January, according to Prospect News data.

There was also Salesforce.com's $500 million of five-year convertibles and four other deals by other issuers. They included BioMed Realty Trust Inc. pricing $150 million, Beazer Homes USA Inc. pricing $50 million of mandatories; KKR Financial Holdings LLC pricing $100 million and Lexington Realty Trust's $100 million deal on Jan. 21.

SanDisk flat to lower dollar neutral

SanDisk's 1% convertible due 2013 traded at 80.5 bid, 81 offered on Friday versus shares that were sharply lower, settling down $4.46, or 12%, to $25.42.

On Jan. 19, the SanDisk convertibles traded at 83.75 versus a share price of $28.25, and on that day the stock fell 5.4% to $27.98.

The Milpitas, Calif.-based flash memory maker posted better-than-expected results after the market close Thursday but issued a disappointing outlook that failed to meet investor expectations.

SanDisk forecast revenue for the current quarter of $875 million to $950 million and 2010 revenue of $4 billion to $4.4 billion.

Convert players said SanDisk was the top trading name of the day according to Trace data.

"SanDisk is active, off a buck, which isn't too bad, but the common is getting killed," a New York-based sellsider said.

EMC idles at recent lows

EMC's 1.75% A series convertibles due 2011 traded at 116.5 on Friday with its stock lower at around $16.70, which compared to 117.85 versus a share price of $17.00 on Tuesday. That number was down 3.5 points from a week earlier.

The EMC 1.75% B series convertibles due 2013 traded at 118.63 late in the day, which was down 3 points, according to Trace data.

Shares of the Hopkinton, Mass.-based data storage company ended down 37 cents, or 2.2%, at $16.67 in stronger-than-normal volume.

The EMC convertible paper has slid from levels that ranged from the mid 120s up to nearly 130 for the 2013 convertibles. It was among recently shopped large blocks of convertibles that were sold to reduce the positions of hedge funds, including Citadel, sellsiders said.

Kodak re-take

Kodak's 7% convertibles due 2017 traded on Friday at 112 versus a share price of $6.10, compared to 105 bid, 106 offered versus a share price of $5.50 on Thursday.

Shares of the Rochester, N.Y.-based company added 13 cents, or 2.2%, to close at $6.05 on Friday.

On Thursday, the paper dropped 0.5 point right off the bat to 107.25, bid 107.75 offered after the initial trades at 107.75 bid, 108.25 offered.

"They got killed. I don't have any idea why," a New York-based sellside trader said. "They were tumbling against the same hedge."

In contrast, shares of the Rochester, N.Y.-based digital photography company shot up $1.17, or 25%, to $5.92 in extremely heavy volume on Thursday.

Mentioned in this article:

Eastman Kodak Co. NYSE: EK

EMC Corp. NYSE: EMC

SanDisk Corp. Nasdaq: SNDK

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