Advanced Micro, Cypress gain, but Intel weaker; Hutchinson prices upsized $225 million deal

By Rebecca Melvin

Princeton, N.J., Jan. 19 - The convertibles market saw strengthening in pockets on Thursday as the technology sector continued to attract the lion's share of attention, convertibles players said.

But a few airline names managed gains and the auto sector was a touch better, they said.

The convertibles of Advanced Micro Devices Inc. extended gains for a second consecutive day, jumping about 12 points, in line with their underlying shares, on the heels of positive earnings news.

The 2.95% convertible bonds of Intel Corp. slipped another 0.3 to 0.5 point however after falling 6.5 points on Wednesday after negative earnings.

With the spotlight on semiconductor companies, and in light of the fact that the a gap is being eyed in semiconductor paper due to Advanced Micro's and Micron Technology Inc.'s convertibles being called, players were taking a fresh look at Cypress Semiconductor Corp., a New York-based sellside convertibles trader said. Interest helped lift Cypress' convertibles in line by more than a point.

The trader added that there was activity on several fronts and including names such as nursing home drug-services provider Omnicare Inc., long-term care facilities provider Manor Care Inc. and information-technology services company Synaptics Inc.

In biotechnology, activity remained muted with the exception of some strength in the 2.25% convertibles of Human Genome Sciences Inc. - both the new and the old issues - sparked by a Wachovia analyst upgrade on the equity side.

But the convertibles of MGI Pharma Inc. remained weak despite a nearly 1% gain in its underlying shares after a Thomas Weisel analyst based in San Francisco initiated coverage at "outperform."

Other biotech names getting a look this week despite the focus on techs included CV Therapeutics Inc. and Nektar Therapeutics because of Food and Drug Administration decision dates expected next week, a biotech analyst said.

Meanwhile, in the primary arena, a deal finally emerged ahead of the bell from Hutchinson Technology Inc. Pricing occurred after the close.

"It's about time. It's been about a month since we've seen a new deal," a New York-based sellside analyst said. He didn't count NRG Energy Corp.'s mandatory convertibles deal seen coming Jan. 25 because it has been seen on the horizon for several months.

During the day, reaction was mixed to Hutchinson Technology's deal. A New York-based buysider said that a shortage of balanced convertibles in the tech space meant that demand should be good. But an analyst said that he had heard it wasn't doing so well and there were credit concerns.

Two analysts put the Hutchinson deal 2% cheap at the midpoint of price talk, one using a credit spread of Libor plus 400 basis points and volatility of 34%, and the second using a credit spread of Treasuries plus 525 bps and a volatility of 35%. A third analyst said that based on recent past financials, he put the credit spread much tighter at about 300 bps over Libor.

Hutchinson prices upsized deal

Hutchinson priced Thursday an upsized $225 million of 20-year convertibles to yield 3.25%, according to a company release.

The deal of convertible subordinated notes was expected to be $175 million. Pricing came at the middle of talk on the coupon, which was for a coupon of 3% to 3.5%. Price talk for the initial conversion premium was 27.5% to 32.5%, according to a syndicate source. It wasn't known at press time where the premium was set.

The deal was sold via bookrunner Merrill Lynch & Co., and with co-managers Citigroup Global Markets and Needham & Co.

There was an over-allotment option to purchase up to an additional $25 million of the total principal amount of the notes.

The bonds will be non-callable for five years, with puts in years seven, 10 and 15.

Proceeds are expected to be used for general corporate purposes, including capital expenditures for TSA suspension and TSA+ suspension manufacturing capacity, facilities and tooling, and for the development of new process technology.

The company is a Hutchinson, Minn.-based supplier of suspension assemblies for disk drives.

Regarding the credit concerns discussed earlier in the day, a sellside anslyst said, "They are spending a lot on capex. As of the end of September, they spent $197 million and they are planning to spend another $280 million. So people are a little leary. They are definitely not generating enough cash."

In addition "their typical gross margin has been 28% to 32%, but in the latest quarter it was 21% gross margin, and before that it was 20%," he said.

So there are the questions of how it will maintain its capital expenditure plans and whether when they're done, the market will still be there to sustain the expansion, he said.

Technology advances may mean that more capacity on a single platter may occur, and in that case there will be less demand in the future for the suspension systems that Hutchinson makes.

Nevertheless, the company holds more than 50% of the market for the arms, or suspension, that holds the head of disk drives.

Human Genome jumps

The two issues of 2.25% convertibles of Human Genome due 2011 and 2012 gained more than 3 points on Thursday after a Wachovia upgrade, traders said.

The upgrade was prompted ahead of the potential release of phase 2 Albuferon data for hepatitis C trials, according to a New York-based buyside biotech analyst.

Human Genome Sciences, based in Rockville, Md., develops protein and antibody drugs.

In November, Human Genome said interim results of the phase 2 clinical trial showed that the drug was safe, well tolerated and showed robust antiviral activity.

The trial was to evaluate the safety, tolerability and efficacy of Albuferon (albumin-interferon alpha) in combination with ribavirin in patients with chronic hepatitis C.

The 2.25% convertibles due 2011 ended the day around 91 bid, 91.50 offered, up 3.7 points on the day; while the newer 2.25% convertibles due 2012 finished at 83.875 bid, 84.375 offered, up about 3.4 points. Shares of Human Genome (Nasdaq: HGSI) added 66 cents, or 6.6%, to $10.7201.

MGI Pharma weaker

The convertibles of MGI Pharma Inc. didn't respond to a nearly 1% gain in the company's shares after a Thomas Weisel analyst based in San Francisco initiated coverage of MGI at "outperform."

Earlier this month MGI Pharma disappointed investors with its pre-reported 2005 financials and 2006 guidance.

Its 1.682% convertibles traded at 60, while its shares (Nasdaq: MOGN) added 15 cents, or 1%, to $16.10.

Focus turns to CV Therapeutics, Nektar

In addition, names in the sector getting a look this week despite the focus on techs included CV Therapeutics Inc. and Nektar Therapeutics because of Food and Drug Administration decision dates seen next week, a biotech analyst said.

CV Therapeutics is expecting FDA approval on its drug ranexa for chronic stable angina on Jan. 27.

Also, after the bell, Nektar said it has named Louis Drapeau as senior vice president, finance and chief financial officer. Drapeau was previously at BioMarin Pharmaceutical Inc. in the same post. He succeeds Ajay Bansal, who resigned as CFO effective immediately.

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