Symmetricom prices wide, still breaks below par; Cephalon off to 98; Impax bid up; Doral eyed

By Ronda Fears

Nashville, June 3 - Buyers strong-armed Symmetricom Inc. to pony up the full amount of coupon on its convertible, further illustrating the changing environment in the primary market, but the San Jose, Calif.-based communications equipment maker's new issue still dipped below par out of the gate and hovered there.

Symmetricom pricing at the wide end of indicative terms for the tiny $100 million issue came on the heels of Milwaukee mining equipment maker Joy Global Inc. abandoning its $260 million deal when potential buyers pushed for better terms. Betwixt those, drugmaker Cephalon Inc.'s $800 million deal has been underwater on an outright basis since it priced at par and also at the wide end of guidance.

Cephalon's new 2% convertible slipped about a half-point Friday to settle at 98 bid, 98.125 offered, a trader said.

In part, one convertible hedge fund manager said the ongoing flight to quality, or Treasury rally, made him sit on his hands this week as the new deals were being marketed. "If the Treasury market backs up and you start putting on positions now, you could get killed, be stuck with it," he elaborated.

While new issues met with some resistance, and even in the face of a downdraft in stocks, traders said there were some solid bids in the convertible market and many of those were for some rather speculative names. As one sellsider put it, "Not that risk tolerance is better by any great degree, but people are definitely still in the market for yield. That's where we're seeing the bids."

Impax Labs Inc., for example, saw its convertible bid up, but offers were scarce as holders lobby for incentives to not pursue a default on the company failing to file its financial reports on time with the Securities and Exchange Commission.

Symmetricom seen at 99.25

Symmetricom sold its $100 million of 20-year convertible notes at par to yield 3.25% with a 26% initial conversion premium - at the wide end of yield talk for a 2.75% to 3.25% coupon and at the cheaper end of premium guidance of 25% to 30%.

A buyside trader said the issue broke at 99.25 and he never saw it move from there. "It was offered above par, but there were no bids," he said. "I didn't see it trade over 99.25."

The San Jose, Calif.-based communications equipment maker plans to use proceeds for working capital and general corporate purposes, which may include acquisitions.

The buysider said that, while he didn't get involved in the deal, he liked the stock story and the convertible was smart on Symmetricom's part.

"That is a good deal for the company. It suggests they can borrow money without too onerous terms," the trader said. "It is understandable that they would sweeten the pot, within reason. That would make sense in that they are not shooting themselves in the foot. I think this is very interesting."

Doral 4.75% convertible eyed

There are several situations similar to the Impax Labs situation in that convertible players are mindful of late filings and any opportunities they might provide. Puerto Rican mortgage company Doral Financial Corp. is another situation that has been brewing since the first of the year and recently providing a lot of fireworks.

Holders of Doral's 4.75% perpetual convertible preferreds - a $345 million issue sold at par of 250 in September 2003 - apparently have not yet become involved in negotiations or lawsuits surrounding its delayed filing and technical defaults it triggered, but market sources said the issue, at 50% of par, may be worth a look even in the face of the looming landmines.

The company has a grace period to bring its financials up to date but, much like Impax, onlookers don't expect the company will comply within the timeframe because of the magnitude of issues it is facing.

Doral's convertible was quoted, for an indication, at 120.5 bid, 125.5 offered at Friday's close. Sellside market sources said the issue is still trading, but nothing was seen moving Friday. Doral shares ended off 6 cents, or 0.5%, at $12.03.

In an SEC filing last week, the company said that at least until it is current in financial reporting, it would suspend the use of the resale shelf registration statement for the 4.75% convertible and if unable to permit the use of the registration statement by June 10, it will be required to pay damages to holders in the amount of 0.50% of par until the resale registration statement becomes available again or through Sept. 22.

Doral terms enticing: analyst

If one can get comfortable with the risk involved, one sellside convertible analyst said the 4.75% issue is definitely worth considering.

"I might be a buyer. At 9.5%, up 65% [with the issue at 125] it looks pretty cheap," he said, noting the issue would be theoretically worth the 250 par using a credit spread of 500 basis points over Treasuries and a 45% stock volatility.

"If you can get a sense that this company is not going away, with the $12 stock price these look significantly cheap. They have a significant amount of cash and originations were not off but something like 1% last year. Of course, we've not seen any recent financials."

At the end of March, Doral said it had $2.8 billion of cash and equivalents, $1.85 billion of which was available.

A week ago, Doral delayed its first-quarter report, broadened the scope of a restatement that it warned of in January, and said it was in technical default under two bond indentures covering five issues that total roughly $1 billion. In addition, the company said it will have to seek waivers on $14.7 billion of credit facilities, of which $8.6 billion is outstanding, plus from the banks or counterparties in some $4 billion of derivatives used to hedge its interest rate risk.

Doral holders quiet so far

An attorney involved in one of the many lawsuits arising out of Doral's situation said thus far he's not aware of any 4.75% convertible holders joining in the litigation.

At the heart of the dispute is Doral's accounting for floating-rate, interest-only strips, which now the company estimates will result in a $600 million pretax writedown in the value of those securities - the high end of its previous $400 million to $600 million range. Plus, some analysts say the writedown may get even worse.

With the massive drop in Doral share prices, many say Doral has been the target of potential acquirers and the convertible analyst pointed out that the 4.75% issue does not have any takeover protection features that have become standard over the past year. The $12 stock, by the way, is down from $50 in January.

Christopher Hinton, one of the lead attorneys at the New York firm of Murray, Frank & Sailer LLP in a lawsuit brought against Doral over the situation, said that no convertible preferred holders have joined that suit, or any others that he is aware of.

Doral security holders all around seem to be open to the company finding a buyer, but with little hope in light of its troubles.

"There are some people looking and watching," Hinton said. "On a stock valuation basis, it looks pretty cheap, but there is an extreme amount of regulatory risks and other risks. It seems that certainly no one would want to take that on."

The SEC has launched an informal probe into Doral's planned restatements, which will go back to 2000 through 2004. The situation also caused Standard & Poor's to cut Doral's credit to junk, with a negative outlook.

Doral outlook uncertain

Outside of the trouble with accounting for the I/O strips, Doral's business looks fairly stable, credit analysts said, but the full impact of the situation may not yet have come to light. In a letter to shareholders, Doral chief executive Salomon Levis said the company's banking, mortgage, insurance and brokerage businesses "are sound and currently operating strongly."

"Doral has held a major position in the Puerto Rican mortgage marketplace, so it is difficult not to wonder whether the fall in its securities prices is overdone. But we fear these issues may cause liquidity problems - a death sentence for financial companies," said GimmeCredit analyst Kathleen Bochman in a report Wednesday, who said investors should avoid the credit.

"Doral has already felt the impact of its delayed financial reporting. It is the subject of several class action shareholder suits. The company is unable to make a registered offering of securities, even if there were investor demand, until it files its financial statements. And the Nasdaq notified the company that its preferred stock is subject to delisting, although Doral is appealing."

Bochman said in a previous report that, given the plunge in Doral's securities, "We think the upside and likely ending for the company is to sell to a larger, well-capitalized bank, which would be great for bondholders and shareholders alike. But we think things will get worse before they get better."

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