Tyco convertibles drop to 97 on accounting charge news only to end higher at 102

By Sara Rosenberg

New York, April 30 - Tyco International Ltd. was one of the bigger stories Wednesday as its convertibles swung down to around 97 in response to a news report that the company may face a $1.1 billion charge and then headed back up to around 102 with the common stock to close higher on the day.

Tyco's series A 2.75% convertible due 2018 was quoted at 101 7/8 bid, 102 1/8 offer late in the session, according to a trader. A second trader had the convertible quoted at 101.5 bid, 101.75 offer, up 0.5.

Tyco's series B 3.125% convertible due 2023 was quoted at 102¼ bid, 102½ offer, according to a trader. A second trader had the convertible quoted at 102.13 bid, 102.38 offer, up 0.8. The stock closed at $15.60, up 23c or 1.5%.

On Wednesday morning, the Wall Street Journal reported that there might be some additional accounting problems at Tyco that could result in a $1.1 billion charge.

During the morning, Tyco announced that second quarter results would be announced after market hours on Wednesday as opposed to Thursday morning. The company also revealed that it would report a loss from continuing operations of 23 cents per share for the quarter, compared to a loss from continuing operations of $1.03 for the same period last year, and revenues of $9 billion, up 4% from $8.6 billion in the second quarter of 2002.

"Second quarter 2003 results included 55 cents per share in after-tax net charges related to primarily non-cash adjustments arising out of the company's intensified internal audits and detailed controls and operating reviews, a change to an accelerated amortization method for its ADT dealer program account assets, and a change in the accounting for the connect fee associated with ADT's dealer program," a company release said.

After hours, the company announced that earnings per share from continuing operations for the six months ended March 31 were 8c per share, including 55c related to the after-tax net charges. By comparison, for the six months ended March 31, 2002 the loss from continuing operations was 56c per share, including $1.65 related to the charges.

For the six months ended March 31 revenues were $17.9 billion, a 4% increase over the same period last year due to favorable changes in foreign currency rates.

The charges arising out of the ongoing program of intensified internal audits and detailed controls and operating reviews were $997.4 million pre-tax, including the $265 million to $325 million range of anticipated charges announced on March 13.

"I am disappointed that our intensified internal audit and review efforts have identified additional charges, but I believe at this point we have identified all, or nearly all, legacy accounting issues," said Ed Breen, chairman and chief executive officer, in a news release. "We have completed balance sheet reviews for all of our 2,154 accounting entities, and completed on-site verification of these reviews covering the vast majority of our assets. Additionally, the issues we have identified are almost entirely non-cash."

Tyco is a Pembroke, Bermuda diversified manufacturing and service company.

Titan Corp.'s 5¾% High Tides convertible preferred securities also received some attention on Wednesday, rallying to 50 from 46 on news that they will be retired, according to an analyst.

The company announced Wednesday that it plans to sell $200 million of senior subordinated notes. Proceeds from the note offering, combined with $50 million in borrowings under its existing senior credit facility plus additional cash on hand, will be used to redeem in the High Tides convertibles.

"Assuming the deal gets done, it's good for Titan," the analyst added.

The stock closed at $8.03, up 23c or 2.95%.

Titan is a San Diego technology developer and systems integrator for the Department of Defense, the Department of Homeland Security and intelligence and other government agencies.

"Market tone is overall lackluster. There's nothing really tremendous going on today. We're not super-busy. There's muted flow in terms of the secondary," an analyst said.

"We've been active on the Calpine 4s just because of customer flow," the analyst continued. "We've been active in Micron bonds after Infineon announced their new convertibles just because they're in the same business. [And], we're trading some Teva Pharmaceuticals because they report tonight."

The Calpine 4% convertible due 2006 was quoted at 79.9375 bid, 80.9375 offer, up 0.188 on the day, according to a trader. The stock closed at $5.37, up 17c or 3.27%.

Micron Technology's 2.5% convertible due 2010 was quoted at 102 bid, 102.5 offer, down one point on the day, according to a trader. The stock closed at $8.50, down 16c or 1.85%.

"People are taking different views [on Infineon]. There's a positive and there's a negative spin," a trader said. "The Infineon bonds expanded quite well once U.S. traders got involved. I thought they were quite cheap."

Infineon Technologies AG launched a subordinated convertible bond issue through its Dutch subsidiary Infineon Technologies Holding BV on Wednesday. Goldman Sachs International and Morgan Stanley & Co. International Limited are the bookrunners.

The bonds were priced with a 5% yield and a 46% initial conversion premium, according to the trader.

The transaction was announced at €700 to €725 million and will convert into up to 69 million shares of Infineon Technologies AG, the equivalent cash amount at the company's discretion or an equivalent cash/share combination, according to a news release.

The convertible matures in seven years, is non-callable for the first three years and callable thereafter subject to a 125% provisional call. Further terms were not available as Prospect News went to press.

Infineon is a Munich, Germany provider of semiconductors and complete system solutions.

Teva Pharmaceutical Industries Ltd.'s 0.375% convertible due 2022 was quoted at 122.19 bid, 122.69 offer, down 2.120 on the day, according to a trader. The stock closed at $46.70, down $1.17 or 2.44%.

The company is scheduled to release first quarter 2003 financial results on Thursday morning, Israel time. According to Multex Investor, the mean analyst estimate for earnings per share is 46 cents.

"We were trading some DuPont [Photomasks]. It opened at par 1/4, par ½ and has basically been trading that way all day. It did get as high as par ¾ on the offer side," the analyst said.

The stock closed at $18.61, down 22c or 1.17%.

"It was pretty tightly held," a trader said in regards to DuPont Photomasks Inc.'s new deal. "It opened and traded right around issue. It wasn't priced rich like some of the other issues. It was priced pretty fairly."

DuPont Photomasks' sold an upsized $105 million offering of convertible subordinated notes due 2008 to yield 1.25% with a conversion price of $25.60, 36% above the stock closing level of $18.83 after the close Tuesday. Lehman Brothers and Credit Suisse First Boston are the lead managers on the Rule 144A offering.

The Round Rock, Texas manufacturer of photomasks said that proceeds will be used for general corporate purposes, and may also be used to acquire additional businesses, products, and technologies and to invest in joint ventures. Furthermore, proceeds may also be used to repurchase or repay the company's outstanding convertible subordinated notes due 2004.

"We're still seeing deals come fairly aggressively priced," an analyst said. "Like Kansas City. It was originally talked at 17.5 to 22.5% and then it comes at 25% premium."

As for the MSC.Software deal, "we think it's slightly rich," the analyst said. "About 1% rich."

Kansas City Southern priced an upsized offering of $175 million redeemable cumulative convertible perpetual preferred stock at par for a yield of 4.25% and with a 25% initial conversion premium. Price talk included 4.25% to 4.75% yield at an initial conversion premium of 17.5% to 22.5%.

The Rule 144A deal, via joint bookrunners Deutsche and Morgan Stanley, priced after hours on Tuesday.

Originally, the deal was expected to be sized at $120 million with a $12 million greenshoe. Now the deal contains a $25 million greenshoe.

The Kansas City, Mo. owner and operator of a North American rail network will use proceeds to help pay for the proposed acquisition of a controlling interest in Grupo TFM.

MSC.Software sold $85 million of convertible notes due 2008 at par to yield 2.5% and with a 30% initial conversion premium. Price talk on the deal was for a 2.25% to 2.75% yield with an initial conversion premium in the 25% to 30% range.

The Rule 144A deal, via lead manager Merrill Lynch & Co., was accelerated to price after market hours on Tuesday.

Santa Ana, Calif.-based MSC.Software said it plans to use proceeds to repay borrowings outstanding under its credit facilities and other debt. In addition, the company will use approximately $10 million of the net proceeds to collateralize the scheduled interest payments on the notes.

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