Navistar 4.75% gains two points on cash tender offer; American Tower gains with stock

By Kenneth Lim

Boston, Feb. 24 - The convertible market was quiet on Friday, with Navistar International Corp.'s midday tender offer to buy back the $220 million outstanding of its 4.75% exchangeable notes making the biggest bang.

The convertible bond, which has been callable since April 2005, climbed about two points to just a hair's width shy of par.

"You know, I think this was in many ways expected because the bonds were trading two or three points below par for a while," said a sell-side analyst.

Also gaining slightly on Friday was American Tower Corp., which beat estimates in its fourth quarter despite reporting a wider loss. Chesapeake Energy Corp. was quiet despite better than expected fourth-quarter earnings and a surge in oil prices that gave the stock a boost.

Navistar tender boosts bond

Activity in Navistar (NYSE: NAV) spiked up on Friday after the Warrenville, Ill.-based maker of truck and industrial engines offered to buy back at par its outstanding $220 million of 4.75% convertibles due 2009.

A buy-side source said the 4.75% was quoted at 99.5625 bid, 99.8125 offered against a $29.50 stock price late in the day. The company's 2.5% convertible bonds due 2007, which are not covered by the tender offer, were at 104 bid, 104.5 offered at the same stock price.

The sell-side analyst noted that the 4.75s were trading in the 97 to 97.5 range on Thursday.

The stock closed at $29.48 on Friday, up 65 cents or 2.25%.

Navistar's cash offer expires at midnight ET on March 23 and requires that holders of a majority of the principal amount to accept both the offer and that the company's audit for fiscal year 2005 has not been completed.

Citigroup, Credit Suisse and Banc of America Securities are the dealer managers for the offer.

Navistar has had to delay the reporting of its fiscal year 2005 results due to disagreements with its external auditors, Deloitte and Touche. The company has reassigned its controller, Mark Schwetschenau, and said on Thursday that it continues to work with the auditors on the outstanding issues, which include whether some leases should have been capitalized rather than accounted for as operating leases, and whether some affiliates should have been consolidated rather than equity-accounted. The company has not said when the report will be ready and has declined to provide guidance for 2006.

Friday's cash offer was the latest in a number of tender offers during the week made by Navistar, which has signed a three-year, $1.5 billion loan agreement with a syndicate of banks to help finance the debt buybacks. Credit Suisse is lead arranger.

On Thursday, Navistar also made cash tender offers for $393 million of 9.375% senior notes due 2006, $250 million of 7.5% senior notes due 2011, and $400 million of 6.5% senior notes due 2012.

The sell-side analyst noted that the 4.75% convertibles have already been callable since April 2005, which propped up their market value to near par. He said the company probably chose to tender for the convertibles at par rather than call them, because calling would require the company to pay bondholders about par plus 2.036. And bondholders may not mind much because the securities were trading below par before the offer.

"By tendering for them at par, they save two points, plus investors make some money," he said. "Everybody makes a little bit of money, I guess."

The tenders also resolve disputed default notices related to Navistar's outstanding debt. The company has been declared in default by holders and the debt trustee because of the failure to file in its financial reports on time but said that it disagrees.

American Tower loss beats forecasts

American Tower on Friday said its fourth-quarter loss widened to $87.3 million from $74 million in the year-ago period. But the loss per share improved to 21 cents from 32 cents, and a convertible analyst said some analysts were expecting the company to be 29 cents per share in the red.

The 3% convertible bond due 2012 was marked at about 165 bid and 165.25 offered against a stock price of $32, said a trading source. American Tower stock (NYSE: AMT) gained 73 cents, or 2.32%, to close at 32.21 on Friday.

"I would imagine that the loss was not as wide as they had imagined," the analyst said. "It beat estimates even though they lost a lot of money."

Boston-based American Tower, which operates broadcast and wireless communications towers, said its loss was affected by an accounting charge and the number of outstanding shares. Revenue for the quarter increased 67% to $307.6 million, a large portion of which was accounted for by newly acquired SpectraSite Inc. American Tower expects a loss from continuing operations of $3 million to $5 million in the first quarter, and is guiding for a loss of $25 million to a profit of $10 million from continuing operations for 2006.

Another analyst said the company's convertible bonds - it also has 3.25% and 5% bonds due 2010 - were very equity sensitive and were likely to move with the stock regardless of the company's credit quality.

"These things are for the most part deep in the money anyway," he said. "They have relatively low premiums and their deltas are in the high 90s. Whether the credit improves or not is irrelevant to the valuation. They're so equity sensitive."

Chesapeake results boost bonds

Chesapeake Energy Corp. (NYSE: CHK) said late Thursday that its profit more than doubled in the fourth quarter, but the natural gas producer's convertible bonds were quiet on Friday despite the stock's improvement.

"The preferreds have been trading cheap from the theoretical value, but it's not a particularly busy day, and I don't think it's big, impactful news," a sell-side analyst said.

Chesapeake's 4.5% convertibles due 2054 were marked at about 92.75 bid, 93.25 offered against a stock of $30.25 on Friday. The stock closed at $30, up 70 cents or 2.39%.

Oklahoma City-based Chesapeake reported fourth-quarter earnings of $431.8 million, or $1.11 per share, compared to $163.2 million, or 52 cents per share, in the same period the year before. Profit was $324 million, or 84 cents per share, after adjusting for price-hedging gains and losses from early debt repayment and stock exchanges.

A buy-side analyst said he thought the Chesapeake preferred convertibles were "a little bit cheap" because "they [Chesapeake] still have good organic growth and they don't have a lot of the risks associated with other producers who are operating elsewhere."

Chesapeake, which operates mainly in offshore U.S. territory, is not as exposed to hurricanes and foreign governments who "rewrite the contracts to try to change the terms," he said.

Another convertible analyst pointed out that concern about Iran and reports of an explosion in Saudi Arabia sent oil prices surging and may have contributed to Chesapeake's gains on Friday. But he said the Street faces "a bit of conflict" on how to react.

"Everybody's calling oil above $50 a barrel and below $70," he said. "And if that's the case, you should probably be buying on weakness and selling when the price goes up."

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