Wachovia analyst suggests barbell position in Nextel 6%, 4.75% converts

By Ronda Fears

Nashville, Feb. 20 - With no surprises in Nextel Communications Inc.'s earnings, Wachovia Securities, Inc. convertible analyst Jeanine Oburchay suggests a barbell position in the company's 6% and 4.75% issues. Outrights may like the 5.25% issue, as well, but she noted that upside in that issue is limited as the stock approaches $20-plus.

It was another solid quarter for Nextel with no surprises as the company met its guidance and beat analysts' expectations. There were also more debt retirements, Oburchay noted.

Nextel reported 2002 gross revenue of $2.33 billion and EBITDA of $886 million.

Year-end cash and equivalents were $1.8 billion. Long-term debt was $12.3 billion, as the company continued to retire and buy back some debt. In fourth quarter, Nextel retired $588 million in debt and preferreds and said it plans to cut debt further in 2003, but declined to estimate by how much.

Free cash flow for fourth quarter was $106 million.

For 2003, the company said it will generate more than $500 million in free cash flow and EBITDA of at least $3.8 billion.

As of the end of the fourth quarter, Nextel has bank facilities totaling $6.0 billion, of which $4.5 billion is already drawn and $1.5 billion remains available.

Wachovia believes at year-end Nextel's debt/EBITDA ratio was 3.5x. Bank covenants call for total debt/EBITDA below 7.0x, secured debt/EBITDA below 3.0x and EBITDA/interest above 2x.

"We believe Nextel will continue to have substantial breathing room relative to its covenants," Oburchay said in a report Thursday, noting debt maturities do not begin in significant measure until after 2006.

Nextel has $600 million of the 4.75% convertibles due 2007 currently outstanding. This bond has a yield to maturity of 6.3% with a current yield of 5.0% and a conversion premium of 64.7%. The bond, which trades at 94.25, is currently callable at 102.714.

There is $1 billion of the 6% convertibles due 2011 currently outstanding. This bond has a yield to maturity of 6.48% with a current yield of 6.19% and a conversion premium of 70.69%. The bond, which trades at 96.5, has hard-call protection through June 4, 2004, at which time it will be callable at 104.

The company also has $1.15 billion of the 5.25% convertibles due 2010 currently outstanding. This bond has a yield to maturity of 9.4% with a current yield of 6.62% and a conversion premium of 335.9%. The bond, which trades at 79.50, is currently callable at 103.5.

"We believe investors should own a barbell of the 6% bonds and the 4.75% bonds," Oburchay said.

"Outright investors may want to own the lower dollar price, higher current yield 5.25% but should be aware that as the stock approaches the $20-plus range, the upside on these bonds will be limited."

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