Scottish Re rides stock upgrade, but confusion persists on put; Andrew approaches par on CommScope bid

By Kenneth Lim

Boston, Aug. 7 - The convertible bond market was quiet on Monday as investors held their breaths ahead of the U.S. Federal Reserve Tuesday meeting.

Scottish Re Group Ltd. improved after the stock was upgraded by Bear Stearns on confidence about the company's liquidity. But analysts see interesting times ahead for the company's 4.5% convertible due 2022 after data miner Xtract Research suggested that the paper may legally be put only in 2007, instead of 2006 as is widely assumed.

Meanwhile, Andrew Corp. climbed closer to par after it received a takeover offer from CommScope Inc. CommScope's convertible, meanwhile, fell in line with the stock after its bid was announced.

Otherwise the market had a slow start to the week.

"Honestly, it's pretty quiet today," a buyside convertible bond trader said. "There were no major earnings announcements, I didn't see any markets or [news] that was market-related, at least for the names we're involved in. In terms of trading, there's nothing sticking out."

A sellside convertible bond trader said investors were waiting to see if the Fed will end its regime of interest rate hikes when it meets Tuesday. The trader said many investors expect a break in the interest rate increases soon amid signs of slowing growth in the economy.

"I think people are kind of waiting for the meeting tomorrow...I don't think they'll raise it, but I don't think it's any kind of revelation," the trader said.

Scottish Re put date in question

Scottish Re's 4.5% convertible due 2022 gained in light trading on Monday after Bear Stearns upgraded the stock on confidence about the company's credit and its new management. But observers say the note might come under new scrutiny after a closer look at the indenture suggests that the put date may technically be a year later than earlier assumed.

Scottish Re's convertible was marked at 96.625 against a stock price of $7.75 on Monday. Scottish Re stock (NYSE: SCT) closed at $7.66, up by 2.41% or 18 cents.

Bear Stearns analyst Saul Martinez on Monday upgraded Scottish Re stock to peer perform from underperform. The analyst cited confidence in the company's ability to meet its medium-term financial obligations and in the company's new management for the upgrade, but stressed that the company must build back its credit rating. Credit rating agencies have downgraded the company after it reported a surprisingly large second-quarter loss and announced the resignation of its chief executive.

Also Monday, discrepancies between the 4.5% convertible's indenture and other documents and statements by the company may cast doubt over whether the security may be put in December 2006 as is widely assumed, said data mining company Xtract Research.

The convertible's indenture says that Dec. 6, 2007, is the first put date for the convertible. Although this appears to be the only document in which the put is in 2007 - Scottish Re has consistently said that the first put is in 2006 in the convertible's prospectus, its annual report, press releases and conference calls - the indenture is the key document.

"The indenture says the first put date is December 6, 2007 and the prospectus and annual report both say it is December 6, 2006," Xtract Research managing partner Manish Aggarwal wrote in an e-mail. "It is our view that since the indenture is the governing document the December '07 put date is the date the company would have to honor especially if it is in the interest of bond holders."

An amendment to the indenture in October 2004 deleted Scottish Re's option to repurchase put convertibles using shares and required the company to buy back the notes with cash - another recent source of confusion - but did not change the 2007 date, Aggarwal noted.

"The problem is no one looks at the indenture," Aggarwal said, adding that he has left messages with Scottish Re seeking clarification but has not received a response.

Market sources were surprised to learn of the discrepancy on Monday, and all said that if the put were indeed in 2007 it would lower the value of the convertible.

But a sellside analyst reckoned that Scottish Re will likely amend the indenture rather than risk angering investors by telling them to wait another year to put the convertibles.

"There's a real question of good faith here, because the company after telling everybody that it's an '06 deal, and then if they went back on that, they'd probably be done with the debt market for some time," the analyst said.

Andrew climbs on new bid

Andrew Corp.'s 3.25% convertible due 2013 improved about 3 points outright on Monday to just shy of par after the company received a new takeover bid from CommScope.

The Andrew convertible traded at about 99.25 versus a stock price of $9.625. Andrew stock (Nasdaq: ANDW) jumped 21.17% or $1.67 to close at $9.56.

Meanwhile, CommScope's 1% convertible due 2009 fell about 6 points outright after its bid was announced. The convertible changed hands at 137 against a stock price of $27.875. CommScope stock (NYSE: CTV) closed at $28, down by 7.16% or $2.16.

"It was easily one of the busiest names this morning," a sellside convertible trader said.

Hickory, N.C.-based CommScope on Monday offered to buy Westchester, Ill.-based Andrew for $1.5 billion in cash, or $9.50 per Andrew share. CommScope makes communications cable systems, while Andrew develops products for radio frequency systems.

CommScope's offer beat out an earlier bid by Eden Prairie, Minn.-based rival ADC Telecommunications Inc., which offered a stock swap now worth around $1.1 billion based on ADC's current stock price. ADC's 1% convertible due 2008 did not trade on Monday, but its floating-rate 5.795% convertible due 2013 changed hands at about 92.875 against a stock price of $12.22, less than a point higher on an outright basis. ADC stock (Nasdaq: ADCT) improved 4.5% or 55 cents to end at $12.77.

"That was the news this morning," a buyside convertible bond trader said.

A sellside convertible bond analyst noted that all-cash deals tend to close faster than stock-based takeovers, and reckoned that Andrew's convertible likely moved closer to par on the improved chances that the deal would go through. And holders of the bond are likely to want to put the convertible back to the company upon the change of control, the analyst said.

"You're not going to keep an instrument that's not convertible into the acquirer's stock, you'll exercise your change-of-control put, because if you don't the next put is in 2008," the analyst said. "There's no advantage to owning this thing."

For ADC, it remains unclear whether the company will make a higher bid or drop out of the battle for Andrew. And because the bonds are far out of the money, they are moving in sympathy with the stock, the analyst said.

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