Red Hat, Juniper, other tech convertibles active; XM slips; VeriSign announces deal; markets 'cautious'

By Evan Weinberger

New York, Aug. 13 - Activity in the tech sector led by Red Hat Inc., Kulicke & Soffa Industries Inc., Juniper Networks Inc. and Hutchinson Technology Inc. highlighted action in the secondary market Monday as analysts and traders steeled themselves for yet another unpredictable week of activity.

"It seems like whatever happens one day, just the opposite takes place the next," one trader said. "So far, it's anybody's guess."

Market watchers said convertibles investors were still waiting to see how the broader markets fared before making any significant moves. "It's cautious," one trader said of the state of the market.

One new deal was put on the table Monday, with VeriSign Inc. announcing plans to price $1.1 billion in convertible debentures Tuesday. The Mountain View, Calif.-based voice and data network services provider also is allowing for a $200 million over-allotment option on the Rule 144A transaction.

But as was the case last week, all eyes remained on the equities market. And despite the slippage at the end of the day, market watchers said that the markets seemed calmer than they have in previous weeks. Cash injections by the Federal Reserve intended to juice some liquidity out of the markets, including a relatively small $2 billion Monday, and news that private investors were willing to pony up capital to stabilize Goldman Sachs Group Inc.'s Global Equity Opportunities fund to the tune of $3 billion appeared to have buoyed investors early.

One other secondary issue that was active Monday was XM Satellite Radio Holdings Inc. The Washington, D.C.-based satellite radio provider saw its 1.75% convertible senior notes due Dec. 1, 2009 slip to 83.5 versus a closing stock price of $11.11. They closed Friday at 83.75 versus a stock price of $11.41.

"I think people are just adjusting their spreads out on their names," an analyst said.

XM stock (Nasdaq: XMSR) closed down 30 cents, or 2.63%, on Monday.

The markets were "much calmer," according to another trader. "Panic has taken a step back, Goldman getting new investors in their fund is a market calming force too."

After hovering in the plus-30- to 80-point range for most of the day, the Dow Jones Industrial Average slipped in the last hour, closing at 13,236.53, a loss of 3.01 points, or 0.02%.

The Nasdaq followed a similar pattern of trading up most of the day but closing marginally lower. The tech-heavy index closed at 2,542.24, a loss of 2.65 points, or 0.10%.

"It just does feel like today the market is taking a breather," an analyst said. "Everybody's waiting for someone else to make a move."

Tech convertibles active

Not everyone was waiting for someone else to make a move Monday as several technology sector convertibles were actively traded.

Bargain hunters looking for good value and potential upside, according to a trader, were especially active in the sector. "You have a rotation from one type of investor to another," he said.

Among the movers were Red Hat's 0.5% convertible senior unsecured notes due Jan. 15, 2024. The notes closed Monday at 102.75 versus a closing stock price of $21.77. They finished the day Friday at 103 versus a stock price of $21.98.

The Raleigh, N.C.-based software producer saw its stock (NYSE: RHT) lose 21 cents, or 0.96%, on Monday.

Kulicke & Soffa Industries, a semiconductor wire bonding assembly company with headquarters in Fort Washington, Pa., saw its 0.5% convertible subordinated notes due Nov. 30, 2008 trade slightly higher Monday. The convertibles closed at 93.697 versus a closing stock price of $8.51. They closed Friday at 93.131 versus an $8.69 stock price.

The company's stock (Nasdaq: KLIC) closed 18 cents, or 2.07%, lower Monday.

Zero-coupon convertible senior notes due June 15, 2008 issued by Juniper networks made a leap Monday. The convertibles closed at 166 versus a closing stock price of $33.16 on Monday. They ended Friday at 161.50 versus a $32.09 stock price.

The Sunnyvale, Calif.-based computer networking company saw its stock (Nasdaq: JNPR) gain $1.07, or 3.33%, on Monday.

Also in the tech sector, Hutchinson Technology saw its 3.25% convertible subordinated notes due Jan. 15, 2026 slip a bit on Monday. The convertibles closed at 86 versus a closing stock price of $21.35. They ended the day Friday at 86.25 versus a stock price of $21.29.

The Hutchinson, Minn.-based hard drive components producer saw its stock (Nasdaq: HTCH) gain 6 cents, or 0.28%, on Monday.

"I think on a macro basis, there's a case to be made that tech could outperform many other sectors over the next six to nine months," an analyst said.

VeriSign launch set for Tuesday

VeriSign is planning to price $1.1 billion in convertible debentures on Tuesday, the company announced Monday after the market close. The Rule 144A transaction also will have a $200 million greenshoe.

Initial reaction hasn't been focused on the talk - which is a coupon of 2.75% to 3.25% and an initial conversion premium of 20% to 22.5% - but on the puts.

More specifically, it is the lack of puts. The debentures are set to mature in 2037 and have 10 years of call protection. But there are no puts. In a market where many investors are looking for convertibles with short-term puts or maturities, 30-year paper hasn't gone down well with several observers. "30 years! Ugh!" one analyst said.

And a fund manager said the lack of puts and long-term investment would hurt the value of the bonds.

"[It] makes investment value pretty microscopic, no?" he said. "Am I missing anything?"

VeriSign stock (Nasdaq: VRSN) finished the day up 39 cents, or 1.33%, on Monday, closing at $29.65.

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