Xilinx flat to weaker in the gray; older Xilinx adds; Transocean better; Salesforce surges

By Rebecca Melvin

New York, June 3 - Xilinx Inc. launched a $520 million offering of seven-year convertible senior notes ahead of the market open Thursday, and while it turned heads simply because of sheer scarcity of new deals in the last month, the offering wasn't attracting a whole lot of participation from the hedged community, market sources said.

"People do not like the Xilinx deal. The credit is fine but the terms are stingy," a New York-based sellsider said.

There was an early gray market in the planned paper at 99.125 bid, 100.125 offered, and later it was 99.5 bid, 100.125 offered. One analyst said there had been no marks on it on his desk.

The existing Xilinx 3.125% convertibles due 2037, which were looking better to holders than the new ones, rose by about half a point to 91.

Transocean Ltd.'s convertibles were also up, extending an upturn that began late Wednesday after a big sell-off made it enticing once again.

Overall, the tone of the convertible market was better Thursday, compared to the earlier part of the week, and market participants were more willing to be involved in different things beyond the oil patch, which had dominated the week thus far.

"People were more willing to trade. There were more buyers and sellers. Before yesterday, most folks were focused on oil spill interest," a sellside analyst said.

Salesforce.com Inc.'s convertibles jumped along with a move up in their underlying shares, which were unjustly pummeled last week during the broader markets' sell-off.

Salesforce's 0.75% convertibles due 2015 traded at 122 versus a share price of $93.25, which was up from about 114 previously, according to a pricing source.

And Symantec Corp.'s convertibles traded amid a 2% gain in their underlying shares after news of a buyout of information technology security company Sonicwall.

Xilinx flat to lower in gray market

Xilinx's pending sale of $520 million of seven-year convertibles - expected to price after the close of markets Thursday - was initially 99.125 bid, 100.125 offered in the gray market and later quoted at 99.5 bid, 100.125 offered.

Price talk on the Rule 144A offering was for a coupon of 2% to 2.5% and an initial conversion premium of 22.5% to 27.5%. The bonds are non-callable for their seven-year life.

Those terms weren't seen as attractive to convert arb players, who wouldn't be able to set it up with a decent return profile, a New York-based sellside trader said.

Using a credit spread of 300 basis points over Libor, 30% vol. and a borrow cost of 50 bps, the planned bonds looked 0.5% rich at the midpoint of talk, according to the trader.

"This name has never been a name for hedge funds, not even the existing ones," a sellside analyst said. "The company is known for issuing things like this. The old ones mature in 2037 and while there is a soft call in 2014, it basically has no put rights in the interim. With the new ones at 2017, that looks pretty long."

"I'm not surprised hedge funds are not really following this one. This name is mostly for outrights," the sellsider said.

Xilinx is a San Jose, Calif.-based maker of electronic equipment and systems.

Existing Xilinx adds

The existing Xilinx convertibles due 2037 with a 3.125% coupon traded last at 91.288, which was up 0.688 point on the day, according to Trace data, and a sellsider said his desk traded the paper at 90 versus a share price of $24.65.

Xilinx shares added 58 cents, or 2.4%, at $25.24 on Thursday.

Of the two Xilinx issues, some players liked the older ones better, but some didn't.

"I don't really like the old ones either because it's a 30-year bond, really more like equity than debt," a New York-based sellsider said of the older paper. The sellsider that favored the older paper said he didn't favor them by much.

Call spread pushes premium to 75%

J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. are the joint bookrunners of the deal, with co-managers Credit Suisse Securities, Goldman Sachs & Co. and Morgan Stanley & Co. Inc.

Proceeds will be used to repurchase shares of Xilinx common stock, with a portion earmarked to fund the cost of convertible note hedge transactions. The balance of the proceeds will be used for general corporate purposes.

Xilinx intends to enter into warrant transactions with one or more of the initial purchasers, which could have a dilutive effect if the Xilinx stock price exceeds the applicable strike price of the warrants.

Xilinx also intends to enter into convertible bond hedge transactions to limit potential dilution.

The call spread makes the effective premium from the company's perspective 75%.

While using proceeds to buy back shares may be objectionable, one trader thought the company was demonstrating some savvy to do so.

"In my opinion, the use of proceeds is no problem because this is such a strong balance sheet. Net cash is still around $800 million pro forma. The company was smart; they have funded a buyback of shares with cheap money. All in with the call spread, they basically bought back stock and sold it forward seven years out up 75%, and that is all at an interest cost of about 4% to 4.5% all in. That is a pretty good alternative to buying back stock for cash," the trader said.

Transocean recovers

Transocean's 1.625% series A convertibles due 2037 traded last at 98.25 on Thursday, according to Trace data, which was up from 97.5 on Wednesday. A sellsider said his desk had traded the paper at 97.25 earlier in the day.

The Transocean 1.5% series C convertibles due 2037 traded at 85.5 last on Thursday, after trading Wednesday as low as 81.5, which was down from 86.5 late Tuesday and down from 89.5 on Friday.

The Transocean 1.5% B convertibles due 2037 were last seen at 90.312. It had also traded at 90.25, which was up from 88.5 on Wednesday and flat compared to 90.25 on Tuesday.

As for what was pulling Transocean higher, sources said it was nothing more positive than the fact that the market had calmed down from panic selling on Wednesday, and at the new lower levels, the paper looked appealing.

Yesterday "people just didn't want to deal with the uncertainty and paper was offered at a lower price in the market. Toward the end [of Wednesday], there were more bids in the market, and in the last hour of trading, transactions were off the lows, and today it's keeping up," the analyst said.

The value is there, especially for the Transocean A paper, which is putable in December, the analyst said.

"The As are north of 8% yield to put. For people who want to put their cash to work, they definitely want to look at this. Even with the liabilities, no litigation or lawsuits will be settled by December," he noted.

On Wednesday BP plc embarked on a new plan to stop the oil leak from an exploded drilling rig in the Gulf of Mexico, but its effort to cut and cap a pipe ran into technical difficulties.

"The stock is going to remain volatile for awhile whenever the government says something or the attorney general pushes forward on lawsuits. It will definitely affect the stocks and the bonds. You won't see either the stocks or bonds stabilizing at a certain level," the analyst said.

Mentioned in this article

Salesforce.com Inc. NYSE: CRM

Symantec Corp. Nasdaq: SYMC

Transocean Ltd. NYSE: RIG

Xilinx Inc. Nasdaq: XLNX

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