By Ronda Fears
Nashville, Feb. 21 - It was a good sign that Interpublic Group of Cos. Inc.'s banks did not require collateral when amending its bank facilities, observe Deutsche Bank Securities convertible analysts. They prefer the subordinated converts over the senior 0% issue, and prefer the 1.8% over the 1.87%.
Earlier this month, Interpublic announced it had successfully amended its two main bank facilities - a $500 million 364-day multi-currency revolving credit facility and a $375 million five-year facility - and received a commitment for a new $500 million interim credit facility.
The implications for IPG's convertible bonds was positive, in that there was a sign of support from the banks, but the Deutsche analysts also noted that IPG may still need to access the capital markets.
"It seems that IPG's banks do not regard the situation to be particularly concerning and are providing liquidity without requiring collateral," the analysts said in a report Friday.
Recent rollovers of bank debt by stressed or distressed names, such as Xerox, Solectron, Nortel, Lucent and Calpine, have all required that some form of security/collateral be posted, as a condition in consideration for extending credit by the banks, they noted.
The point of concern for Interpublic is the put on the 0% convertible coming up in December.
While the new bank facilities help, and Interpublic is in the process of selling assets, it may need to tap investors.
"A large mandatory convertible offering would go a very long way in helping to shore up IPG's balance sheet, providing much needed immediate liquidity, rebalancing the capital structure, gaining favor with the fixed income markets, and moving IPG closer to becoming a dividend paying stock again," the analysts said.
"A large mandatory would have a very positive credit impact on all IPG debt, including the convertible bonds, but it could have a negative impact on IPG shares [due to dilution], depending upon the size of the transaction and specific use of proceeds. However, unless IPG is able to make rapid and cost effective progress selling [assets], a capital markets transaction at a subordinated level looks highly possible."
Aside from that possibility, the implications of the bank facilities are positive for all the convertibles, but the analysts prefer the 1.8% due 2004 as it offers better relative value.
All the converts bear the risk of the December 2003 put on the 0% but by buying the 1.8% bond investors get a yield pickup of 400 basis points.
"Our analysis suggests that the recovery rate on the senior debt would only be in the low 20% region in the event of a liquidation," the analysts said.
"The subordination discount currently being employed by the market [for the subordinated 1.8% and 1.87% notes] is exaggerated, and implies that the former two offer attractive relative value versus the latter."
Interpublic 0% convertible due 2021
Ask: 80.25
| Premium: | 276%
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| Yield to put: | 5.10%
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| Current yield: | 0%
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| Conversion ratio: | 22.8143
|
| Conversion price: | $36.634
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| Interpublic 1.8% convertible due 2004
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| Ask: | 89.5
|
| Premium: | 255%
|
| Yield to maturity: | 9.18%
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| Current yield: | 2.01%
|
| Conversion ratio: | 26.772
|
| Conversion price: | $37.35
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| Interpublic 1.87% convertible due 2006
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| Ask: | 76
|
| Premium: | 360%
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| Yield to maturity: | 10.77%
|
| Current yield: | 2.46%
|
| Conversion ratio: | 17.616
|
| Conversion price: | $56.77
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