By Ronda Fears
Nashville, Tenn., Oct. 10 - While PerkinElmer Inc.'s financial health has slipped over the last few months, Bear Stearns & Co. analysts still recommend the convertible based on the high-yielding short-dated put, which they believe the company will be able to finance.
"Perkinelmer's 0.00% convertible senior debentures, putable on 8/7/2003, are currently trading at a YTP of 14.22%. In light of PerkinElmer's announcement that it has amended its bank facilities, we have revisited the name and updated our analysis of the company's credit," said analysts Rao Aisola, Sarah Gallagher and Matt Hempel in a recent report.
"Although the situation has deteriorated since we last wrote about the company [July 19], we still believe the put will get paid. We believe there is a high likelihood that the company will be able to achieve a financing package from existing lenders or from a new lending group in order to finance the 8/7/2003 put."
PerkinElmer can pay the put in cash, stock or a combination of both but paying the put in stock may not be attractive due to dilution issues.
The analysts estimate PerkinElmer will need $307 million in funding to meet the $510 million put on the convertible.
"Given that PerkinElmer needs to bridge this funding gap before the put date, we looked at how receptive the capital markets would be to PerkinElmer issuing either convertible or straight debt," the analysts said.
"Although, PerkinElmer's high dividend makes issuing a convertible security less attractive, the company's current stock borrow, volatility and daily trading volume may enable PerkinElmer to tap the convertible market for necessary funding."
First, PerkinElmer's stock borrow is cold, so investors can hedge their equity exposure.
Next, PerkinElmer's volatility is relatively high with 100-day volatility at 78% and Jan 2005 calls trading at 75% thus commanding a good forward premium.
Lastly, for a company with a relatively small market cap, the average daily trading volume of the stock is a million shares a day.
"This means that if the company issued a $125 million convertible, assuming a 60% hedge and 25% premium, it would take approximately 18 days to execute the hedge. This is less than the average number of days considering that the mean for deals done this year (between $100-$200 million in size) is 25 days," the analysts said.
"A small mandatory (approximately $125 million) would inject equity into PerkinElmer's capital structure, receive beneficial accounting treatment and a favorable view from the rating agencies.
"Although PerkinElmer would not take advantage of its current high volatility levels by issuing a mandatory, PerkinElmer would receive equity credit from the rating agencies (70% if underlier is debt; 80% if underlier is preferred). "
Also, with current debt/EBITDA coverage at 4.0x, the analysts believe PerkinElmer will be able to secure bank financing.
The analysts calculate PerkinElmer has $195 million in available liquidity and that its Fluid Sciences business, which has been for sale for over a year, will not be sold before the put data.
As of June 30, PerkinElmer had two unsecured credit facilities totaling $370 million. The $270 million revolver expires in March 2003 and the $100 million revolving credit facility expires in March 2006. At the end of the second quarter, PerkinElmer had $100 million drawn on its 2006 facility and nothing drawn down on its 2003 facility.
"Although the company had not violated covenants on either of the bank lines at that time, there was concern that the company was in danger of tripping the interest coverage covenant, thereby triggering defaults in other debt," the analysts said.
"Recently, PerkinElmer addressed these concerns by amending the bank facilities, which now allow for $100 million in borrowing under the 5-year facility but allow only $200 million, down from $270 million, on the one year facility."
The company can convert the $200 million facility into a one year term loan, subject to maintaining a last 12-months consolidated debt to EBITDA ratio no greater than 4.25.
"Although we currently calculate PerkinElmer's consolidated debt/EBITDA ratio to be just under 4.0, in an effort to be conservative in our analysis, we have assumed that PerkinElmer will not have access to the term loan when the facility expires in March 2003," the analysts said.
"We also believe that the company is reluctant to rely on the term loan to finance the put, as it only buys the company six additional months."
PerkinElmer Inc. 0% convertible due 2020
| Price: | 49.5
|
| Common price: | $5.44
|
| Premium: | 674%
|
| Ratio: | 11.757
|
| 100-day volatility: | 77%
|
| Yield to put: | 14.22%
|
| Put: | Aug. 7, 2003
|
| Put price: | 55.441
|
| Ratings: | BBB-/Baa3
|
|
|
© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere.
For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.
