Lear, EDS convertibles rise on earnings news; flurry of new issues in week lift July tally

By Rebecca Melvin

Princeton, N.J., July 29 - Earnings news spurred fairly active trading in specific names like Lear Corp. and International Rectifier Corp. on Friday. While FTI Consulting Inc.'s new 3.75% issue kept the convertibles primary market alive after a busy week.

Royal Caribbean Cruises Ltd. convertibles were down a bit on a partial call, but those of Electronic Data Systems Corp. gained on a stronger outlook. There were no evident sector moves, traders said.

Annapolis, Md.-based FTI Consulting Inc. priced $150 million of 3.75% convertibles with an initial conversion premium of 30%. The issue opened at 101.5 Friday and moved up early to 102.25 bid, 102.75 offered.

The issue was seen 3.4% cheap using a credit spread of 400 basis points over Treasuries and volatility spread of 22%, according to one sellside analyst.

The FTI convertible notes came richer than price talk of 3.875% to 4.125% and in the middle of price talk for an initial conversion premium of 27.5% to 32.5%.

"The deal was going great and the company was more sensitive to coupon than to premium, so we decided to go below range in coupon," a syndicate source explained, as to why the coupon came in below price talk.

Trading in the new FTI issue was thin, especially compared to some of the other new deals that came to market this week, including L-3 Communications Holdings Inc.'s $600 million of 3% convertibles that began trading on Thursday and Manor Care Inc.'s issue, which priced after Tuesday's close.

"FTI was relatively small," said a sellside desk analyst, who said his firm didn't trade it.

"It had a lot of call protection and could have done better on the premium," said a hedge fund source. "There was a lot of outright demand, but arbitrage customers had to do it on a high hedge ratio and sell a lot of stock."

Another sellside analyst said there was interest this week in the right names, like Manor Care and L-3. But issues from Barnes Group Inc., which priced $85 million of convertibles, and CSK Auto Corp., which priced $110 million of 20-year convertible notes, weren't as appealing.

Rain quenches new-issue drought

After a drought of issuance in early July, the past week has brought this month's total up to eight, nearly in line with that of June, which saw nine new issues.

The flurry of activity boosted convertible issuance to a respectable eight issues and proceeds of $1.9 billion in the month, according to Citigroup's Convertibles New Issue Monthly.

In the first half of the month, there was just one new issue with proceeds of $150 million.

Nevertheless, year-to-date figures remain tilted toward 2004, the report said. "Through the first seven months of last year there were 128 new issues, which raised $31.7 billion, compared to the current year-to-date totals of 66 deals and $17.2 billion in new issue proceeds," it said.

While it was suggested that the week's flurry was due to a rush to get things done before the "real" summer doldrums set in, at least one buyside source said it may portend a more active August than usual due to "pent up demand."

On the whole, new deals went more successfully for June and July compared to April and May. Yields are way down this month compared to June, at about 2.75% for the coupon in July, compared to 5% in June, a sellside desk analyst said. Premiums were essentially flat from month to month, in the low 20% range.

Conseco Inc. has a $300 million convertible deal on tap, but as of Friday there was still no word on timing or the bookrunner for the deal.

The Carmel, Ind.-based insurance company's deal is part of a refinancing of bank debt, including a new $475 million term loan via Banc of America Securities LLC and JPMorgan.

Lear convertibles gain

Lear convertibles gained along with a boost in its stock after the Southfield, Mich.-based auto parts maker reported weak results for its second quarter but apparently cheered investors with the promise of a potential 2006 turnaround and prospects for divestiture of the company's interior business.

Traders said the convertibles traded up Friday but stopped promptly after a downgrade from Moody's on the heels of the earnings report.

"The intensely competitive automotive industry has posed challenges for all companies in the sector," Gimme Credit senior analyst Craig Hutson said in an industry report. But, "how each issuer fares can be very different."

On Friday, Hutson said that Lear's weak results were due to lower production on key North American platforms and higher raw material costs. Although sales increased 3.2% on new business, EBITDA dropped 39.4%, he said.

In June, Lear announced that it is restructuring to address competitive challenges. Restructuring costs and other charges totaled 98 cent on the quarter as Lear reported earnings of 66 cents a share, versus $1.58 a share one year ago.

Because of the lower earnings, cash restructuring costs, and change in supplier terms with General Motors Corp., Lear expects its free cash flow for 2005 to be a deficit of $375 million. This compares to a January forecast of $250 million and $317 million generated in 2004.

Lear said it's expecting a much better fourth quarter and improvement in 2006. It also announced that it is exploring strategic options for its interior controls business, which represents nearly $3 billion of sales.

Lear's 0% convertibles due 2022 gained about 0.50 point to trade at 46.25, compared to trades Thursday at 45.50 bid, 45.75 offered.

Trading was active until after Moody's downgraded the company's unsecured debt to Ba2 from Baa3 and assigned a corporate family rating of Ba2 and a speculative grade liquidity rating of SGL-2, a sellside trader said.

Moody's said its actions were due to reduced expectations for the company's near-term profitability and cash flow, higher debt associated with funding requirements arising from negative operating cash flow, higher capital expenditures and disbursements under restructuring programs, and lower debt protection ratios over the intermediate term.

Moody's went on to note that Lear has an experienced operating team, profitable operations outside of North America and sufficient liquidity to finance its cash needs over the next 18 months.

In addition, Lear has received an underwritten commitment for a $300 million term loan to provide further liquidity cushion. This facility is being syndicated and is expected to close in August.

Shares of Lear gained $2.20, or 5.42%, to $42.77.

The convertibles of American Axle & Manufacturing Holdings Inc. were also seen lower on Friday, according to a trader. The Detroit-based maker of drive shafts reported Thursday a 66% drop in quarterly earnings due to a slump in U.S. auto production and higher steel costs.

American Axle's 2% convertible due 2024 was seen at 82.31 bid, 83.31 offered versus a stock price of $27.55

International Rectifier

The convertibles of International Rectifier were flat to slightly lower as its stock plunged Friday after the El Segundo, Calif.-based maker of chips to power electronic gear reported lower fourth-quarter profit and forecast gross margin would be hit by a profit-sharing plan in fiscal 2006.

Following the results, the company received a pair of downgrades to "hold" from "buy" from Smith Barney Citigroup and from "neutral" to "buy" from UBS.

International Rectifier's quarterly income slipped to $24.7 million, or 35 cents a share, from $29.4 million, or 42 cents, in the year-earlier period.

For the year, earnings grew to $137.5 million, or $1.91 per share, from $89.8 million, or $1.31 per share, a year ago. Adjusted earnings amounted to $167.3 million, or $2.30 per share, while revenue increased 10% to $1.17 billion.

But analysts were looking for $2.30 per share for the year's profit and $1.18 billion in sales.

In addition, the company said that it expects flat gross margins in fiscal 2006 related to a broad-based profit sharing plan, which will lower gross margin by 1% during each quarter of fiscal 2006.

International Rectifier's 4.25% convertible due 2007 traded at 98.75 versus a share price of $55, but was seen slightly lower later in the day. This compared to a trade on Thursday at 98.25 bid, 98.75 offered.

Shares of the company plunged $7.98, or 14.5%, to $47.05.

Royal Caribbean 'Febs' called

Royal Caribbean's 0% convertibles due February 2021 were down about 0.50 point in a move that traders said was related to a partial call.

The Miami-based cruise line company said it would call $182 million of the face value of the 0% convertible bonds on Aug. 11. The call price is 47.46.

The called amount represents 26% of that outstanding on the bonds, which at issuance totaled $572 million, according to a sellside analyst.

The bonds, which traded Friday at 53.625 versus a stock price of $45.60, are deep in the money and holders are expected to go ahead and convert.

EDS gains on better outlook

The convertibles and stock of Electronic Data Systems rose after the Plano, Texas-based company lifted its second-quarter earnings estimate and guidance for the full year.

The technology services company declined to say why results looked substantially stronger than expected when reported Aug. 3, but observers said the company has turned a corner in terms of improved efficiencies.

Preliminary results are for earnings of five cents a share. Excluding non-recurring items, earnings should be nine cents a share, which topples the previous estimate of analysts surveyed by Thomson First Call, who had been anticipating a loss of five cents a share.

For 2005, the company intends to raise its earnings forecast, excluding non-recurring items, by 10 cents a share to a range of 50 cents to 60 cents a share, compared to analyst estimates of 42 cents.

The 3.875% convertible due 2023 traded at 96, compared to trades on Thursday at 94.825 bid. 95.325 offered. Shares closed up 82 cents, or 4.15%, at $20.57.

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