Convertibles weaken; Xilinx trades down on debut; Transocean, Amgen improve, then decline

By Rebecca Melvin

New York, June 4 - Xilinx Inc.'s newly priced 2.625% convertibles fell below par on their debut in the secondary market Friday as the convertible market mostly took cover after ongoing concerns about eurozone debt and a weaker-than-expected U.S. May jobs report sparked a sell-off in equities.

Xilinx's existing convertibles added another 0.5 point to 1 point, however, trading at 92, as convertibles players again expressed more approval for the terms of the older paper over the new.

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

But strength dimmed during the session as the major stock indices, down 2.5% to 3%, weighed on sentiment. And elsewhere there wasn't much activity of note, traders said.

"It was pretty quiet today aside from new Xilinx this morning and Transocean," a New York-based sellside desk analyst said.

A few names seen in trade earlier in the holiday-shortened week traded again Friday, and pricing, which was somewhat resilient early in the day, softened.

Amgen Inc.'s A series convertibles were better early, trading at 99, but later changed hands at 98.

Salesforce.com Inc.'s convertibles, which surged Thursday along with a move up in their underlying shares, were higher again early Friday. But Hologic Inc. traded down 0.25 point to 85.25, compared to an 85.5 transaction for the Hologic 2% convertibles on Thursday.

General tone muted

Overall, market activity quieted on Friday in contrast to better tone and more activity seen Thursday.

Traders attributed Friday's weakness to further fears of European debt problems, fueled by headlines that Hungary is facing a Greek-like crisis. Later the Labor Department showed U.S. non-farm payrolls rose by 431,000 last month, which was below expectations for a rise of 540,000 jobs. The number was also inflated by temporary government hiring for the 2010 Census, and only 41,000 private-sector jobs were actually added.

"Every time you look on the news, the macro backdrop is not conducive to our markets," a New York-based sellside analyst said.

The analyst said that trading action was not "aggressive" one way or another, with no decisively negative moves. But there were small trades here and there.

Activity in Transocean is because it is a special situation, the sellsider said.

"Things were weaker in general - just weaker on low volumes. Also it's the start of the summer and it's a Friday. All those things hurt liquidity, and when things don't trade, it tends to gap more aggressively," the sellsider said.

As for what would help pull the market back up, some sources said resolution of the Gulf of Mexico oil leak would help, but one sellsider said the market is more concerned about the situation in Europe.

The Gulf "is definitely a tragedy, but I think there are more macro fears. When you look at all those peripheral countries in Europe, and you see all the spending that needs to be cut, that's not going to fuel economic growth," the sellsider said.

Furthermore, there are other factors like concerns about China and the possible property bubble and stagflation there, and the U.S. political scene, which has created an atmosphere of uncertainty in terms of regulatory risk, the sellsider said.

New issue pricing set to change

Given the current market, which has moved down and been choppy, current pricing in the primary market is going to have to adjust and cheapen, a sellsider said.

"I think issuers' expectations are going to have to change in light of different market conditions. You can't price things where you did a month ago or two months ago," the sellsider said.

"It's hard to get outright investors. They are hesitant in light of the weak equity markets, and it's tough to issue anything. You've got to figure in an equity market that looks like a bear market, you have to be wary," the sellsider said.

The sellsider said that he didn't anticipate an overly active primary market unless equities improved.

"Unless you really, really need to raise cash, you're not going to issue new paper. I think people are hoping for some kind of a rally in equities," the sellsider said.

Xilinx sinks on debut

Xilinx's newly priced 2.625% convertibles closed at 99.25 bid, 99.5 offered on their debut, versus a share price of $24.98. Earlier the paper traded between 99.5 and par.

One trader said the new paper was trading early "at issue" versus the shares' closing price on Thursday, which was $25.24.

The paper was weak even though it priced beyond the cheap end of talk, which sometimes can boost participation among market players and hence price, but given the current environment, this wasn't the case.

"The market is getting crushed and nothing is holding. Where did you think the bids would come from in a market where equities are off 2.5% and the high-yield market is quite low," a sellside analyst said.

A second sellside analyst said, "I think it's a reflection of how attractive the initial terms were."

In fact, the paper had looked slightly rich at the midpoint of talk, and hedge players weren't seen to be interested.

"Given that the convertible market has taken a significant downturn over the last month, a lot of bonds in the secondary market look cheaper. So optically you have to have it [new paper] cheaper, and gauge the relative market between new issue and existing issues."

Xilinx, the San Jose, Calif.-based maker of electronic equipment and systems, priced $520 million of seven-year convertible senior notes after the market close on Thursday to yield 2.625% with an initial conversion premium of 20%.

The Rule 144A deal priced beyond the cheap end of price talk, which was 2% to 2.5% for the coupon and 22.5% to 27.5% for the initial conversion premium.

"It didn't hurt [that it priced beyond the cheap end], but probably it was not enough to overcome the overall market today," a sellside analyst said.

Longer term detracts

Another trader said the longer term of the Xilinx issue was a major detraction. The bonds are non-callable for life with no puts.

"To me the issue is simple: we're in an extremely low interest rate environment, and seven years is a long time. As soon as rates start moving up, these bonds will crunch. Essentially the play is to be out and put that pre-packaged rate pain onto the next guy. I'm not a fan of musical converts," the New York-based trader said.

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

There is an over-allotment option for up to $80 million of additional notes.

Proceeds of $433.3 million will be used to repurchase shares of Xilinx common stock under an accelerated share repurchase program.

The remaining $19.6 million in proceeds is to fund the cost of convertible note hedge transactions, with the balance going toward general corporate purposes.

Xilinx entered into convertible bond hedge transactions and warrant transactions. The call spread related to these transactions makes the effective premium from the company's perspective 75%.

Existing Xilinx adds

The existing Xilinx 3.125% convertibles due 2037, which were looking better to holders than the new ones, rose by 0.5 point to a point to 92, up from 91 Thursday.

Shares of Xilinx lost 28 cents, or 1.1%, to close at $24.96 on Friday.

Mentioned in this article

Amgen Inc. Nasdaq: AMGN

Hologic Inc. Nasdaq: HOLX

Salesforce.com Inc. NYSE: CRM

Transocean Ltd. NYSE: RIG

Xilinx Inc. Nasdaq: XLNX

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