BearingPoint, Amkor slip on default woes; Red Hat falls outright with earnings; Brandywine plans deal

By Kenneth Lim

Boston, Sept. 27 - The convertible bond market remained active on Wednesday with potential default names coming into play in the wake of a court ruling that found BearingPoint Inc. at fault for failing to file its financial documents on time.

BearingPoint fell outright with the stock as investors reacted to the company's announcement that it needs consents from its bondholders to avoid going-concern qualifications in its financial reports.

Meanwhile, Amkor Technology Inc. fell sharply in the aftermath of a call between the company and bondholders as concerns heightened that the company may not be able to avert acceleration claims quickly.

Red Hat Inc. dropped outright but held on a dollar-neutral basis after the company disappointed analysts with a slowdown in billings growth.

From the primary market, Brandywine Realty Trust launched a $300 million offering of 20-year exchangeable unsubordinated notes, with pricing expected Thursday after the market closes.

Meanwhile, biotech giant Amgen Inc. was expected to gain on Thursday after the company announced late Wednesday that its colon cancer drug Vectibix received approval from the U.S. Food and Drug Administration.

Thousand Oaks, Calif.-based Amgen's 0.125% convertible due 2011 was marked at 100.875 bid, 101.25 offered against the closing stock price of $72.14. Amgen stock (Nasdaq: AMGN) rose 1.96% or $1.39 on the back of the drug approval.

ImClone Systems Inc. was expected to decline on the same news, the latest bump in the road for the smaller drug maker. Vectibix is expected to compete with ImClone's only drug, Erbitux. New York-based ImClone also recently lost a patent fight involving technology used in Erbitux.

ImClone's 1.375% convertible due 2024 was marked at 88.125 against a stock price of $30.20. ImClone stock (Nasdaq: IMCL) fell 2.34% or 69 cents to close at $28.75.

"Amgen had some positive news - the bonds became more active just before the close," a buysider said. "It's negative for ImClone, so I expect ImClone bonds would be lower."

BearingPoint slips on concerns

BearingPoint's series A 3% convertible due 2024 fell about 2 points outright on Wednesday after the company further delayed its financial reports and said it needed to secure consents from its bondholders to avoid going-concern issues.

The series A convertible was marked at 94 bid against a $7 stock price before the market opened on Wednesday, with one sellsider calling it the "explosion of the day." BearingPoint stock (NYSE: BE) fell 8.25% or 70 cents to close at $7.78.

McLean, Va.-based BearingPoint said late Tuesday that it does not expect to be current in its filings as it tries to resolve the fallout from a recent court ruling that the company defaulted on its convertible debt after it failed to submit its financial reports on time. The management and technology consulting firm said it needs to secure consents from the majority of holders of each of its four bond series to avoid a going-concern qualification from its auditors, which could affect its credit and its ability to retain and obtain business.

BearingPoint said it has verbal consents from a majority of holders of its series C and D bonds. The current court dispute was brought by the Bank of New York as a trustee of the series B 2.75% convertible debenture due 2024, but BearingPoint said it was still trying to determine the size of the holdings of the plaintiffs in that case as of Tuesday night. BearingPoint is also appealing the court's decision.

"The kind of situation they're in now, there's a potential cascading situation with all their debt being brought current and possibly having to publish their results with a qualified opinion," a sellside convertible bond analyst said. "I think that really weakens their position."

The analyst noted that BearingPoint will not have enough liquidity to meet all its debt obligations if all the bondholders push for acceleration. Although bondholders are unlikely to actually want their debt accelerated - the company's bonds are trading above par - they might still push for a sweetener, the analyst said.

"If they [the company] did nothing and tried to stonewall this, they could find themselves in a situation where their liquidity dried up pretty quickly," the analyst said. "Now, if you're in a situation where all the debt is coming due...the company is probably going to have to pay some kind of a heavy consent fee."

Amkor falls on liquidity worries

Amkor, which is also seeking consents from bondholders after it was late in its filings, also saw its convertibles drop on worries about the company's ability to secure the waivers that it needs.

The company's 5% convertible due March 2007 fell about 4 points outright, trading at 92.5 versus a stock price of $5.10 as Amkor stock (Nasdaq: AMKR) tumbled 7.93% or 44 cents to finish at $5.11. Amkor's 2.5% convertible due 2011 lost one point outright, changing hands at 82.5 against a $4.95 stock price.

"The 5% went out at around 93, yesterday they were 96, I believe, a week ago it was 99," a buyside convertible bond trader said. "At 93, it's a 22% yield-to-maturity. That's pretty high, so there's obviously some concern there."

The buysider said Chandler, Ariz.-based Amkor had a conference call with holders of its bonds on Tuesday, and the speculation on the Street is that some of the holders held the view that the company was in a technical default. Since Amkor does not have enough liquidity to meet its obligations if all its debts were accelerated, there was new concern about possible bankruptcy if the company could not obtain consents. Amkor provides semiconductor test and assembly services.

"For their 5s they have plenty of liquidity," the buysider said. "But it's once you get past that, it's the other maturities, that's going to be a problem."

A sellsider said it was not clear how the BearingPoint ruling affects Amkor's situation.

"The BearingPoint ruling in general strengthens the position of holders in any of these bonds [that have potential defaults]...but specific to Amkor, I don't really have an opinion," the sellsider said.

Still, "Amkor has pretty weak language from the point of view of the holder in terms of filing requirements, plus they're subordinated, plus there's a very short maturity there," the sellsider said of the 5% convertible.

Red Hat slips on results

Red Hat's 0.5% convertible due 2024 fell about 14 points outright on Wednesday as the stock lost more than a fifth of its value on disappointment over the company's second-quarter results.

The convertible traded at 103 against a stock price of $20.42. Red Hat stock (Nasdaq: RHAT) closed at $20.21, a 23.21% or $6.11 tumble.

"Their earnings didn't go as well as expected," a buysider said. "But dollar-neutral wise they held up."

Raleigh, N.C.-based Red Hat said late Tuesday that second-quarter net income fell 34% to $11 million, or 5 cents per share, from $16.7 million, or 9 cents per share, in the year-ago period. Excluding items, earnings per share were 11 cents, in line with Street estimates.

The developer of open-source software reduced its forecast for full-year cashflow from operations to between $210 million and $215 million, from the earlier guidance of $225 million to $235 million. But growth in billings slowed to 23% year-on-year, from the year-ago growth of 58%.

Credit Suisse equity analyst Jason Maynard maintained his outperform rating on the stock but cut his target stock price to $29 from $35.

"Given Red Hat's disappointing core Linux growth performance in Q2 the stock is likely to be back in the penalty box until they post steady results in both business units," Maynard wrote in a research note. "The key question is whether or not the miss is reflective of a temporary sales disruption or is in fact, a bigger problem of decelerating Linux growth rates. Our sense is that it is probably more of a management execution issue than a major downtick in Linux adoption."

A convertible bond analyst said Red Hat was a victim of lofty expectations.

"What happened to Red Hat is what happens to high-multiple growth stocks that disappoint in some small way," the analyst said. "But in terms of credit, Red Hat is fine."

The reduced cashflow forecast was a negative for equity holders - "a big chunk got taken out of the stock" for that, the analyst said - although the implications on earnings expectations may not have been as great as the stock's retreat suggested, the analyst added.

"People were looking for a huge quarter," the analyst said. "Some sellside [equity] analysts had raised their estimates and were looking for a blowout...My sense is that the sell-off may have been overdone."

Brandywine plans $300 million deal

Brandywine's $300 million offering of 20-year exchangeable unsubordinated notes is expected to price Thursday after the market closes, talked at a coupon of 3.625%-3.875% with an initial exchange premium of 20% and reoffered at 99.

The notes will be issued by Brandywine subsidiary Brandywine Operating Partnership LP, and exchangeable into common stock of the listed company. Brandywine Realty is guaranteeing the notes.

There is an over-allotment option for a further $45 million.

Merrill Lynch, Bear Stearns and Lehman Brothers are the bookrunners of the Rule 144A offering.

Brandywine, a Radnor, Pa.-based real estate investment trust that focuses on office and industrial properties, plans to use the proceeds to concurrently buy back $60 million of its common stock and to partially repay an existing revolving loan. It will also invest in government or short-term securities pending the redemption of its $300 million floating-rate guaranteed notes due 2009, which were issued in March, 2006.

Brandywine stock (NYSE: BDN) closed at $33.22, gaining 1.1% or 36 cents before the deal was announced.

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