Wachovia analyst: refinancing risk key to value of Lamar's convertible

By Ronda Fears

Nashville, Feb. 13 - On the heels of Lamar Advertising Co. reporting slightly weaker earnings than anticipated, Wachovia Securities, Inc. analyst Sri Nadesan noted that refinancing risk sharply impacts the value of the company's 5.25% convertible in relation to where its bonds are trading.

Lamar's 5.25% convertible, which is currently callable, was quoted around 101.25 on Wednesday with the stock at $31.12. The convert was quoted at 99.5 bid, 100 asked on Thursday with the stock at $29.99. The stock dropped $1.38 on Thursday to close at $29.81.

"The key risk to the convertible is the fact that it could be refinanced with another lower coupon convertible, given that parity is only around 67.4," Nadesan said in a report Thursday.

"Although we do not think there is a significant near-term refinancing call risk for the Lamar convertible, this is a risk factor to keep in mind. The fair value of the convertible changes significantly if we assume the bonds may be refinanced."

Using a stock volatility of 40% and a credit spread of 550 basis points over Treasuries, the convertible is fairly valued, Nadesan said in a report Thursday.

But, using a 0% call threshold in valuing the Lamar convertible, it appears to be 5% expensive, he noted.

The volatility is based on Lamar's July 2003 $30 strike call options quoted on the bid side of about 43%.

The spread is based on Lamar's recently issued 7.25% straight bond due 2013 trading at a spread of 324 basis points and the currently callable 8.625% bond due 2007 at 462 bps.

Nadesan said the 8.625s trade at a wider spread due to the fact that the bond is currently callable. Thus, he suggested a bit wider spread for the convert, at 550 bps.

Lamar reported earnings after the market close Wednesday with results slightly below expectations. Organic revenue growth was 5% versus company guidance of 6% and EBITDA growth was 5% versus the company's expectation of 8%.

"In general, the weak year-earlier quarter and the slowly improving advertising market should have allowed the company to meet revenue growth," Nadesan said.

"More important, Lamar suggests that same-board revenue growth will be only about 2% in the first quarter of 2003, whereas same-board EBITDA growth will be nonexistent, with EBITDA expected to be flat year over year."

Lamar did not publish its balance sheet as of the end of the year, but pro forma total debt at Sept. 30 was $1.76 billion, to account for some debt refinancings since the end of third quarter.

The company's leverage ratio was an estimated 5.24x to 5.45x at Sept. 30, 2002, versus 5.55x at the end of fiscal 2001.

Lamar cut back acquisition spending in 2002. In the first nine months of 2002, the company spent $74 million on acquisitions, net of asset sales, compared with $297 million in fiscal 2001.

"This is the key variable that will affect Lamar's credit profile, in our opinion," Nadesan said.

"We expect Lamar to continue to be cautious in terms of acquisitions over the next few quarters."

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