Electronic Data Systems active on potential dividend cut and equity issuance

By Sara Rosenberg

New York, May 11 - Electronic Data Systems Corp.'s convertible debt was pretty active in reaction to news that the company is contemplating cutting its current quarterly dividend of $0.15 per share by approximately two thirds and issuing additional equity.

"It's up about a point, dollar neutral," an analyst said. He saw the convertibles at 91 3/8 bid, 91 7/8 offered against a stock price of $16.35.

"I've seen a lot of numbers come across," a trader said. The bonds came in and then firmed up."

He saw a seller at 91¾ at which point the stock was at $16.50.

The 3.875% convertible closed at 91.26 bid, 91.76 offered, according to another trader, down 1.88, compared to the stock, which closed at $16.48, down $1.03 or 5.88%.

In a late-day 10-Q filing with the Securities and Exchange Commission on Monday, EDS revealed that it was concerned over its ability to maintain an investment grade rating and due to this concern was focusing on ways to improve its credit metrics.

"Management believes it is beneficial to our competitive position to maintain our investment grade credit rating and, over the longer term, to return to our historical solid 'A' rating. Toward that goal, we are evaluating various alternatives, including raising in excess of $1 billion of additional capital through the issuance of equity and/or equity linked securities and reducing the amount of our dividend by approximately two-thirds. Any capital markets transaction would be subject to compliance with registration requirements and general market conditions," the filing said.

On April 5, Standard & Poor's lowered EDS' corporate credit and senior unsecured debt rating to BBB- from BBB, affirmed its A3 commercial paper rating, and removed the company from CreditWatch with negative implications.

On March 24, Fitch Ratings lowered EDS' senior unsecured debt to BBB- from BBB, removed it from Rating Watch Negative, and withdrew the company's commercial paper rating.

Lastly, on February 6, Moody's Investors Service placed EDS' long-term credit rating of Baa3 on review for possible downgrade.

"These credit rating agencies could take further adverse actions with respect to our ratings, notwithstanding any actions we may take to maintain our current investment grade rating," the filing continued "Negative changes in our credit ratings could increase our cost of capital and could result in an increase in the interest rate payable under certain indebtedness."

EDS is a Plano, Tex. information technology and business process outsourcing services company.

Nextel rebounding

Nextel Communications Inc.'s 5¼% convertible started to rebound on Tuesday after selling off over the past couple of days on interest rate worries, according to an analyst. Nonetheless, it was still lower overall on the session.

"It was around par and then it got as low as the 96, 97 area. Now, it's around 98ish," the analyst said around mid-day.

The convertible closed at 97.5 bid, 98 offered, down 2.25 points, according to a trader, compared to the stock which closed at $24.35, up $0.54 or 2.27%.

"Usually when they call you would expect this get a little lift but this was right around employment numbers and interest rate fears," the analyst explained.

Late last week the Reston, Va. wireless communications services company announced that it would redeem all the $608 million in principal amount of its 6% outstanding notes due 2011. The 6% notes will be redeemed at 104% of par plus accrued interest on June 7.

However, noteholders can opt to convert the principal of their notes into class A stock at the $23.8375 conversion price.

New deals hit pipeline

Two new deals joined the relatively scarce pipeline on Tuesday - Pixelworks Inc. and CV Therapeutics Inc. - with both deals slated to price after the close on Wednesday.

Pixelworks launched $125 million of 20-year convertible subordinated debentures talked to yield 1.5% to 2.0% with a 40% to 44% initial conversion premium.

Citigroup Global Markets Inc. is bookrunner of the Rule 144A deal that will be used for general corporate purposes, including potential acquisitions.

Pixelworks is a Tulatin, Ore. designer, developer and marketer of semiconductors and software for the advanced display industry.

CV Therapeutics Inc. launched $100 million of eight-year convertible senior notes talked to yield 2¾% to 3¼% with a 25% to 30% initial conversion premium.

Merrill Lynch is bookrunner of the Rule 144A deal that will be used to repurchase a portion of the company's outstanding convertible debt, including subordinated debt, to fund an escrow account to provide security for the first six scheduled interest payments on the notes and for general corporate purposes, which may include funding research, development and product manufacturing, preclinical and clinical trials, preparation and filing of new drug applications, product commercialization, increasing its working capital and capital expenditures, according to a company news release.

CV Therapeutics is a Palo Alto, Calif. biopharmaceutical company.

Market still under pressure

Overall, the convertibles market continued to be "under pressure" on Tuesday over interest rate hike concerns with "very few bids" and "mostly things for sale", a trader said.

"Some legitimate convert names have come in pretty hard here. Right now all you get is a lot of levels. There's no way you can feel comfortable buying anything here," the trader added.

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