Intel slips on a hedged basis after lowering revenue guidance; Sino-Forest to miss coupon

By Rebecca Melvin

New York, Dec. 12 - Intel Corp.'s convertibles were down on both an outright and hedged basis on Monday after the Santa Clara, Calif.-based chip giant said fourth-quarter revenue will be lower than expected due to the effects of supply shortages caused by the Thailand floods.

Intel's two convertible bond issues, a 3.25% convertible due 2039 and an older 2.95% issue, both trade on both an outright and a hedged basis.

Other chip or technology-related convertible names such as ON Semiconductor Corp. didn't appear to be under pressure in sympathy with the Intel news.

"We were radio silent on those," a New York-based analyst said of ON Semiconductor.

Elsewhere, Sino-Forest Corp. said it missed a deadline to publish its third-quarter earnings and won't make a Dec. 15 interest payment on its 4.25% convertibles due 2016. The convertibles were said to have slipped to the mid-20s from the mid-30s.

In another speculative situation, THQ Inc. dropped a chunk, trading down to as low as 42 and then back up to 44.75, which was down from 50 previously, a Connecticut-based trader said.

In the primary market, price talk emerged on A. M. Castle & Co.'s planned $50 million of five-year convertible senior notes. The talk is for a coupon of 5.5% to 6% and an initial conversion premium of 20% to 25%.

But a 31% drop in the underlying shares on the New York Stock Exchange on Monday raised questions among convertibles players about whether the deal would get done. The Oak Brook, Ill.-based maker and distributor of specialty metals and industrial plastics also sold $225 million of straight notes.

"It's a bad day for this deal," a New York-based sellsider said.

In the broader markets, equities ended off their worst levels of the day. Early on the Dow Jones industrial average was down triple digits after Moody's Investors Service said the European fiscal pact unveiled last week will not deter it from reconsidering the credit ratings of all European Union nations.

The summit produced "few new measures," leaving Europe at a "critical and volatile stage," Moody's commented.

The Dow ended down 162.87 points, or 1.3%, to 12,021.39. The Nasdaq Stock market ended down 35 points, or 1.3% to 2,612.26, and the S&P 500 stock index closed down 19 points, or 1.5%, to 1,236.47.

"It was a good comeback," a convertibles analyst said about the late action in equities. But contrary to what is typically the case, convertibles aren't trading much in tandem with the underlying moves.

"It seems to be apathy more than anything else," the analyst said. "It hasn't been a very good year - too much work for not a lot or reward."

Give that hedged players are for the most part insulated from the up and down moves of the stock markets, there hasn't been a lot of motivation to trade the market's swings. Last week, stocks rallied on the back of the euro agreement, and this week they are starting out with a swing back, which has been a common pattern of late.

Intel slips on hedge

Intel's 3.25% convertible due 2039 eased to 124.125 bid, 124.625 offered versus the $24.00 closing price of the underlying shares.

Intel's 2.95% convertibles settled at 104.125 bid, 104.625 offered.

The 3.25% convertibles were down about 0.625 point on a hedged basis, and the 2.95% convertibles were down a slightly less 0.375 point on hedge, an analyst said.

They performed worse on an outright basis, with the 3.25% convertibles down about 5 points or 6 points.

Intel shares ended down 4%.

Intel reduced its fourth-quarter revenue forecast for the current quarter by about $1 billion to $13.7 billion, give or take $300 million.

The company said that demand for servers and PCs remains healthy and growing but the months of heavy rains and flooding in Thailand has disrupted a large chunk of the world's hard-drive manufacturing, and causing a slowdown in production by computer makers including Dell and Hewlett-Packard.

Intel also lowered its forecast for fourth-quarter gross margin to 64.5%, plus or minus a couple of percentage points, compared to 65%, plus or minus a couple of percentage points.

Needham & Co. downgraded the shares of the company to "hold" from "buy," writing that the shares are now fairly valued given some of the near-term risks raised by the shortfall.

A. M. Castle talked

The Castle coupon was talked at 5.5% to 6%, but the deal wasn't getting a lot of reviews in the market given its small size. Typically, deals under $100 million in size are disregarded by a large portion of the market, which doesn't want to become entangled in a very illiquid security.

The convertible also has a $10 million greenshoe.

A. M. Castle also priced $225 million of straight notes and plans a new $100 million revolving credit facility.

The Rule 144A deals were being sold via Jefferies & Co. Inc.

Proceeds were expected to be used to help finance the acquisition of Tube Supply Inc. and refinance existing debt.

The deal was seen as having a difficult borrow.

Assuming a credit spread of 1,300 basis points over Libor and a 40% vol., the deal modeled 8.5% cheap, according to one market source.

Mentioned in this article:

A. M. Castle & Co. NYSE: CAS

Intel Corp. Nasdaq: INTC

ON Semiconductor Corp. Nasdaq: ONNN

Sino-ForestCorp. Pink Sheets: TRE

THQ Inc. Nasdaq: THQI

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