Transocean rises, then pares gains; SunPower, NetApp up; Salix sells upsized $300 million

By Rebecca Melvin

New York, May 27 - Transocean Ltd.'s three convertible bond issues bounced higher early Thursday, leading the overall convertible market to more solid footing, amid higher Transocean shares and hopes that BP plc's latest effort to cap the ruptured oil well that is leaking into the Gulf of Mexico will be successful.

Later, Transocean pricing came back in somewhat following news that president Barack Obama is extending a six-month moratorium on drilling permits and after a White House press conference, in which the president said he is angry and frustrated at BP's inability so far to stop the oil spill that began April 20.

During the session, BP said that the procedure to "top kill" the well by pumping heaving drilling fluids into it was moving in the right direction but that it would take more time before it was known if its efforts worked.

While Transocean is typically atop the convertible bond market's most active trading list, this week it has really been a centerpiece of trade. The weakness in Transocean set the stage for the whole market last week and into Monday and Tuesday, before strengthening began Wednesday in tandem with tightening in that name.

"They're the heavyweight in the space. As perceived risk in that name grew, credit spreads widened in the space greater than was justified," a New York-based sellside trader said.

SunPower Corp. saw some trading of its 1.25% convertibles, which were a bit higher outright but didn't keep pace with the jump in shares spurred by the San Jose, Calif.-based solar panel maker's $700 million joint venture to operate a panel-making plant under construction in Malaysia.

NetApp Inc. was another active name in the convertibles space after the Sunnyvale, Calif.-based data storage company reported earnings that beat estimates.

In the primary market, Salix Pharmaceuticals Ltd. priced an upsized $300 million offering of five-year convertible senior notes after the market close on the cheap end of talk at par to yield 2.75% with an initial conversion premium of 30%.

The new issue was initially talked at $200 million when it was launched early Thursday.

Salix's existing 5.5% convertibles due 2028 weren't heard in trade.

Overall trading was described as narrowly based, with Transocean volume exceeding by four times the second most traded name, Medtronic Inc.

"There's volume in two or three names. People would like to see better bids. It's like early 2009, when the credit names, the easy plays, was the stuff that did better right away," a trader said.

Transocean dominates volume

Transocean's 1.5% series B convertibles due 2037 were bid up early Thursday as shares surged as much as 9% in the early going before curbing back to end the day up $1.13, or 2% higher, at $59.71.

The paper seemed to trade around 94 in some volume.

But both the B and C paper were called up about 0.365 point, with the A paper called flat.

Transocean's 1.625% convertibles due 2037, or the A paper, traded last at 98, which was unchanged but had also changed hands higher at 99.5.

Transocean's 1.5% series C convertibles due 2037, which have lost the most of three sister issues since the well explosion, traded last at 89.75. The paper slipped into the 80s on Monday.

About $29 million of the Vernier, Switzerland-based company's convertibles traded.

But one analyst said that that volume was inflated and not consistent with transactions by the traditional convertible community.

"A lot of it is not actual volume. It's coming out of asset swaps or credit default swap contracts," a New York-based sellside analyst said.

The analyst said that convertible trading volume reported by Trace data has been high for the last couple of days. He said that the situation was the same for the high-yield market.

"The volume is $840 million right now, and yesterday it was $845 million. But this isn't all real volume. It's from unwinds of swap trades and CDs contracts."

"A good portion of the RIG trades appear to be unwinds," the analyst said.

SunPower lifts on joint venture

SunPower's 1.25% convertibles due 2027 traded at 82.75 last, which was a point higher on the day.

The 1.25% bonds are considered busted, or not really trading with the stock, and they were the more active of the SunPower issues, according to a Connecticut-based sellside trader.

"They are stronger, but still look like cheap yield at 12% for a company with a $1.1 billion market cap cushion," the trader said of the 1.25% SunPower bonds.

Shares of the San Jose, Calif.-based solar company shot up $2.40, or 2%, to $13.20 on Thursday.

SunPower launched its joint venture with AU Optronics Corp. to operate SunPower's 1.4 gigawatt solar cell fabrication facility now under construction in Malaysia.

NetApp jumps on earnings

NetApp's 1.75% convertibles due 2013 were higher outright by about 6 points or more, but they didn't necessarily keep up with the Sunnyvale, Calif.-based company's shares, which ended up $5.74, or 18.8%, at $38.17.

NetApp reported that its profit more than doubled on strong demand for data storage systems.

NetApp posted fiscal fourth-quarter income of $145.1 million, or 40 cents a share, compared to $68.4 million, or 21 cents a share, for the same period a year earlier.

Revenue rose to $1.17 billion from $879.6 million. Adjusted income was 50 cents a share.

Analysts had expected the company to report earnings of 44 cents a share on revenue of $1.08 billion.

"With 50% growth in product revenue this quarter, NetApp significantly outperformed the competition. With accelerating revenue growth every quarter, we culminated our fiscal year with record levels of revenue, earnings per share, and free cash flow," said Tom Georgens, president and chief executive, in a news release.

The company anticipates that revenue for the current quarter will be in the range of $1.10 billion to $1.14 billion.

Salix prices upsized deal

The registered $300 million Salix offering was sold via joint bookrunners Bank of America Merrill Lynch and Jefferies & Co. Inc. Co-managers were BMO, Caris, JMP Securities and Piper Jaffray & Co.

The notes are non-callable for life with no puts.

Salix entered into capped call transactions in connection with the offering intended to reduce potential dilution upon conversion of the notes, except if the volume-weighted average price of Salix shares exceeds the cap price at the time of conversion.

Proceeds are earmarked for business development and other general corporate purposes, including commercialization of potential products, clinical trials, R&D, and general and administrative expenses. A portion of the proceeds will also be used to pay the cost of the capped call transactions.

Salix is based in Raleigh, N.C., and makes and markets prescription pharmaceuticals for the treatment of gastrointestinal diseases.

Mentioned in this article:

Medtronic, Inc. NYSE: MDT

NetApp Inc. Nasdaq: NTAP

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

SunPower Corp. Nasdaq: SPWRA

Transocean Ltd. NYSE: RIG

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