New SanDisk slips below par on debut; older SanDisk weakens; Intel active; volumes light

By Rebecca Melvin

New York, Aug. 20 - SanDisk Corp.'s newly priced 1.5% convertibles due 2017 sunk below par out of the chute Friday, which was the paper's debut after the $1 billion offering priced late Thursday.

The new SanDisk paper's terms, including its longish maturity and low coupon, were blamed for the initial weakness. But those terms were a compromise that helped the issuer and investors meet their objectives, a syndicate source pointed out.

"This deal kind of threaded the needle" in terms of getting done, the source said.

While it's not the big juicy 3% coupon that investors like, it is a large issue, a repeat issuer, and a tech name, and those are attributes in its favor, the source said.

In addition, the underlying stock weighed on the bonds.

The new deal accounted for the lion's share of trading on Friday.

The older SanDisk 1% convertibles due 2013 were also active, retracing a chunk of an initial 2-point outright gain for those notes, which were trading around 93 on Friday.

Elsewhere, the Intel Corp. 2.95% convertibles were active again in follow-on trading after the chip giant said Thursday it is buying software-security maker McAfee Inc. for $7.7 billion.

Allergan Inc.'s 1.5% convertibles and Transocean Ltd.'s 1.5% convertibles were also among the session's top volume names, but there was no apparent news in these names that contributed to the transactions, a sellsider said.

For the week just passed, trading overall was light and pricing was flattish to up slightly amid tight supply, sources said.

High delta names like Alcoa Inc., Steel Dynamics Inc., Ford Motor Co. and Hertz Global Holdings Inc. were weighing in index results, but not on heavy volume, a New York-based sellside analyst said.

Medtronic Inc. was also down on decent size, he said. And in the face of weakening credit and a weak equity market, it was uncertain that the market overall was better, he said.

"On an outright basis, prior to today, the market was flat, the equity market down again today, and if you strip out the effects of SanDisk, you still have a lot of names down big today on not so heavy volume," he said.

But another sellsider said a lot of names were offered up and bids followed. That trader put the market up 0.5 point for the week.

"Everything basically got better," he said.

SanDisk's seven-year term

SanDisk's seven-year term following on the heels of the seven-year term of Teleflex Inc.'s $350 million of 3.875% convertibles at the beginning of August caused at least one sellsider to question whether seven years might become a new norm that gets deal flow going again.

A second sellsider said that he didn't expect to see a "rash of deals coming" with the longer maturity.

"There are far too few deals and no changes in tax or monetary policy or from any standpoint to indicate that doing seven years is all of a sudden vogue," the sellsider said.

Nevertheless, it's feasible to see that happening, the first sellsider said, suggesting that if seven-year paper became the common maturity in 2011, it would create an anomaly in 2016 with a gap in puts and maturities.

With the new SanDisk, "it's not going to be expanding in a really positive fashion. And if you have a lot of seven-year paper in 2011, you're not going to have anything due in 2016," the trader said.

Such a trend would make it difficult for market players to find yield and paper with a definable short duration.

SanDisk slips to 99

SanDisk's newly priced 1.5% convertibles due 2017 traded down to 99.5 early in trade. Later the paper slipped to 99 with the stock at $41.40, which was where the stock was standing when the price was 99.50.

Shares of the Milpitas, Calif.-based flash storage company came back slightly from that level to settle at $41.50, down 40 cents, or nearly 1%.

The weak stock weighed on the convertible bonds.

"If this had been a positive tape, you would have had a lot more outright people going in and equity guys. But this was not a good stock tape, and structurally this deal is different," a New York-based sellsider said by way of explaining the new paper's weakness.

"If you keep seeing this kind of paper, it's not going to be very forgiving," the sellsider said.

One sellsider valued the deal using a credit spread of 500 to 600 basis points over Libor and a vol. of about 35% and got the paper only 1% to 1.5% cheap, compared to other analysts' valuations that found the paper 2% cheap to as much as 3.5% cheap.

Older SanDisk weakens

SanDisk's existing 1% convertibles traded at around 93 on Friday after jumping to as high as 95 immediately after the new deal was announced.

"I expected them to come in since the whole thing is not being taken out," a sellsider said, referring to the fact that the new issue isn't meant to pay down the entire 1% issue, but only portions of it.

Proceeds will be used for general corporate purposes, including repayment of a portion of its $1.15 billion of 1% convertibles issued in 2006; for capital expenditures for new and existing manufacturing facilities; for development of new technologies; and for general working capital and non-manufacturing capital expenditures; among other things.

If it were the case that the new paper was going to be used to take out all of the older paper, the older paper would likely push up to par. But here there are conflicting trends, with some paper seen being taken out and also the older issue getting cannibalized to a degree by the newer paper.

Mentioned in this article:

Allergan Inc. NYSE: AGN

Intel Corp. Nasdaq: INTC

SanDisk Corp. Nasdaq: SNDK

Transocean Ltd. NYSE: RIG

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