Archstone-Smith's reoffered deal gains on debut; Connetics steady on stock rebound; SanDisk recovers

By Kenneth Lim

Boston, July 11 - The convertible market saw another lackluster session on Tuesday, but a new issue by Archstone-Smith Trust managed to improve on its debut.

Archstone-Smith's new 4% exchangeable senior notes due 2036 rose above par on the back of mid-day gains in the stock after the exchangeable was reoffered below talk at 98.75.

Meanwhile, SanDisk Corp. rose in line with its stock, which rebounded after taking a beating on Monday amid speculation about the company's results and possible competition.

Connetics Corp. came to life on Tuesday, one day after the company delayed filing its first-quarter results and warned that its second quarter would fall below earlier guidance.

The overall market was slow, although demand was better, market sources said.

"Some of these names that are trading on technicals...potential takeover targets, those are the kinds of names that are doing better," said a sellside convertible bond trader. "Things in general are better bid, but there's not a lot of trading volume."

Archstone-Smith stock boosts debut

The Archstone-Smith Trust's new 4% exchangeables due 2036 gained about 1.5 points outright on their debut on Tuesday, in line with what investors were expecting after the deal was reoffered below talk.

The $500 million deal was reoffered at 98.75 with an initial exchange premium of 22%. The notes, which were issued by subsidiary Archstone-Smith Operating Trust, were talked at a reoffer range of 99.25 to 99.75, with the coupon and premium already set.

The over-allotment option in the overnight deal is for a further $75 million.

Citigroup and Morgan Stanley were the bookrunners of the registered off-the-shelf offering.

Archstone-Smith is an Englewood, Colo.-based real estate investment trust with a portfolio of apartment communities run under the Archstone and Charles E. Smith brands.

"I think after two repricings they looked OK," a sellsider said. "The people I talked to were happy with the new pricing."

A buyside trader said the Archstone-Smith convertible was the "main gain for the day," with the new paper trading at about 100.25 versus a stock price of $51.40. But the gain was buoyed by Archstone-Smith stock, which marched upwards for most of Tuesday after early losses. Archstone-Smith stock (NYSE: ASN) closed at $51.37, down by 1.48% or 77 cents.

"It did fine," the buysider said, adding that the five-year put structure was attractive.

A convertible bond analyst said the exchangeable was just over 3% cheap at the reoffered price, which was in line with what investors probably expected, the analyst said.

"The rule of thumb as I understand it is 3% cheap is what you want to see," the analyst said. REITs traditionally pay high yields on the common stock, so the yield advantage in the convertible is usually not enough to attract hedged investors, the analyst said. The 4% coupon in Archstone-Smith's issue was not "absolutely horrible" for hedged investors, but it also was not highly attractive.

Investors interested in the deal would mostly be limited to outrights, but even then the attraction may have been tampered by the view that Archstone-Smith stock seems to have a "pretty high value on it," the analyst said.

"It seemed like it was decent enough on a credit perspective, probably not interesting enough for hedged investors, but maybe some outrights would have liked it," the analyst said.

Archstone-Smith said the proceeds of the deal will be used to repay part of its debt under two unsecured revolving loans and two secured loans. Any remainder will be used for additional investments and general corporate purposes.

Connetics comes to life

Trading in Connetics Corp.'s 2% convertible due 2015 picked up on Tuesday, a day after the company delayed filing its first-quarter results and warned that it would miss guidance in the second quarter.

The convertible traded at 91.25 versus a stock price of $8.24 on Tuesday, mostly unchanged from the day before but about four points higher from the previous week's levels on an outright basis. Connectics stock (Nasdaq: CNCT) closed at $7.99 on Tuesday, up by 2.96% or 23 cents.

Connetics is a Palo Alto, Calif.-based specialty pharmaceutical company.

Connetics stock was upgraded by RBC Capital Markets to outperform from sector perform on Tuesday, a day after the stock tumbled when the company said it will not be able to meet its second-quarter forecast. Connetics has withdrawn its guidance, which predicted net earnings between 7 cents and 9 cents per share for the second quarter. The company also delayed its first-quarter financial report while it completes a restatement for 2005.

"That's exactly what you want to happen on converts," a sellside convertible bond trader said. "You make all your money when the stock goes down and the bonds hold up."

But the trader grumbled about lighter than expected volume in the convertible.

"That [the announcement] having happened yesterday, and no bonds traded I think is a reflection of how poor liquidity is right now. It's either lethargy or apathy."

SanDisk rebounds with stock

SanDisk's 1% convertible due 2013 continued to see active trading on Tuesday and improved outright in line with a rebound in the stock.

The convertible was marked at 85.25 against the closing stock price of $45.70, about two points higher on an outright basis from the day before. SanDisk stock (Nasdaq: SNDK) finished higher by 4.91% or $2.14.

SanDisk stock fell more than 9% on Monday amid speculation about the company's earnings and concerns about its competition.

"The thing that I had heard was a couple of sellside equity analysts had heard there might be some holdup in the next generation iPods, which would put a bit of a hiccup in SanDisk's business, and there might be an issue there with guidance or a preannouncement, but they didn't see anything, so they didn't think there was any truth behind that," a convertible analyst said.

There was also concern about a Monday announcement by memory chip maker Freescale Semiconductor Inc. of a commercial version of an MRAM, or magnetoresistive random access memory, chip. Such chips can store data even when powered off, like the flash memory chips SanDisk makes, but are faster and more durable than flash.

But the new Freescale chip is still more expensive and holds considerably less memory than current flash memory products.

"This Freescale MRAM...is something that's quite a way away," the analyst said.

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