Avaya 0% LYONs up again, moving closer to tender offer price

By Sara Rosenberg

New York, Dec. 24 - Avaya Inc.'s 0% Liquid Yield Option Notes due 2021 moved up slightly on Tuesday in what was described by many as an inactive convertibles market. Market sources had previously predicted that the LYONS would slowly move up to meet the tender offer price announced by the company on Monday.

The LYONs closed at 39.75, up 1/8 from Monday's closing price, according to a trader. The company's stock closed at $2.21, up 5 cents or 2.31%.

On Monday, Avaya announced an exchange offer in which it is offering either a combination of cash and stock worth $407.74 per LYON or $389.61 in cash for its existing 0% LYONs that were issued in October 2001.

The offer covers $660.542 million principal amount at maturity of the LYONs, or about 70% of the amount outstanding.

Funding for the cash portion of the offer will be split between Avaya and Warburg Pincus Equity Partners, LP, which owns 14.5% of Avaya's stock. Avaya will provide up to $100 million and Warburg Pincus will provide up to $100 million of the $200 million in cash that may be needed.

The Basking Ridge, N.J. communications equipment company said the goal of the exchange is to reduce its debt and increase its financial flexibility. It noted that the cost of repurchasing the LYONs is lower than if holders exercise the put on Oct. 31, 2004.

CMS Energy Corp.'s 1.81% convertible due in 2003 saw a very minor change on Tuesday after experiencing a 0.23 improvement on Monday. The convertible closed at 15.58, down 0.01 on the day, while the stock closed at $8.83, down 1c or 0.11%.

CMS Energy's slight rally on Monday may have stemmed from the positive news that it had reached a definitive agreement to sell CMS Panhandle Companies to Southern Union Panhandle for $1.828 billion.

Under the agreement, Southern Union Panhandle will pay $662 million in cash and assume $1.166 billion in debt. CMS intends to use these proceeds to accelerate debt reduction. Already in 2002, CMS has reduced its debt by $860 million, including paying down $239 million in bank debt since July.

CMS is a Dearborn, Mich. integrated energy company.

Meanwhile, Fiat SpA's 3.25% exchangeable due in 2007 was unchanged on the day, closing at 81.625, a trader said. The company's stock closed at $8.30, up 11c or 1.34%.

People have been watching the exchangeable since news emerged on Friday that Fiat sold its entire 5.1% in General Motors to Merrill Lynch & Co. for $1.16 billion through an equity swap. Last December, Fiat sold a $2.2 billion exchangeable using its GM stake.

On Monday, Moody's Investors Service downgraded Fiat to non-investment grade, cutting its senior unsecured debt to Ba1 from Baa3 and short-term debt to Not-Prime from Prime-3. The outlook is negative.

"The downgrades not only reflect Fiat's weak operating performance, especially at Fiat Auto, and its high debt levels, but also Moody's current expectation that Fiat's business and financial profile - even after exercising Fiat's option to dispose of the remaining share of 80% in Fiat Auto to General Motors (GM) - will most likely not be commensurate with an investment-grade rating," Moody's explained.

The rating action is based on the assumption that the company will exit the automotive business of Fiat Auto by early 2004, the intention to dispose of a major part of its financial services business and the sale of its stake in GM as well as other disposals of assets in order to improve its overall financial profile, Moody's added.

Fiat is a Turin, Italy manufacturer and seller of automobiles, commercial vehicles and agricultural and construction equipment.

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