Tyco lower, Nextel edges up; Euronet drive-by on tap; Delta deal rumored; Dress Barn at 104

By Ronda Fears

Nashville, Dec. 9 - Unofficial wedding bells for Nextel Communications and Sprint Corp. reverberated through the markets Thursday but there wasn't much movement in the bonds, which convertible traders attributed to short-covering in Nextel shares taking a priority. The merger noise was not confirmed by the companies, but the converts did edge up slightly on the speculation.

Speculation swirled around Delta Air Lines Inc., too. The converts gained several points Thursday - while the stock ended lower on the day - amid rumors on sellside trading desks in junkland that the turnaround airline was looking to tap the convertible market with a new deal. It came as news to capital markets sources as well as buyside sources, however.

Tyco International Ltd., on the other hand, substantiated long-held speculation that it would use some of its pile of cash to distribute among stockholders. But, an eightfold increase in the dividend had not been expected and the initial reaction in the convertible market was a 2.25-point drop to those bonds. But the Tyco converts were lifted from that low to end off by about 1.5 points on swap.

The primary market continued to stay busy, too, with another small drive-by from Euronet Worldwide Inc., an electronic payment services firm, in the market. Abroad, there also was a small deal marketed by French chipmaker Soitec Group.

New paper from Dress Barn Inc. continued to gain after it broke to trade, but CMS Energy Corp.'s new issue 2.875% convert slipped a bit, ending off about 0.75 point to 99.125 bid.

Nextel, Sprint merger noise

Nextel and Sprint merger buzz was elevated early Thursday by the Heard on the Street column of the Wall Street Journal declaring that the speculation is "gaining increasing buzz," and later the online Wall Street Journal cited people familiar with the matter saying there are definite merger discussions under way.

Still, there was some hesitation, at least among bondholders, to jump aboard, convert traders said. Analysts are split on the feasibility of such a merger, one trader remarked, considering that the companies have relatively equal market values of more than $30 billion.

"We don't have a position in FON/NXTL, but we spoke about the transaction rationale earlier and think that it makes strategic sense," a buyside analyst said. "It would provide NXTL with a migration path to CDMA [code division multiple access], additional spectrum, and diversification of its enterprise and push-to-talk core customer base.

"For FON, it would get access to NXTL's valuable subscribers, which would be easier than building that business from the ground up, as VZ's [Verizon] push-to-talk effort has proven. There are obviously all sorts of issues that would need to be worked out to make this merger work, but regulatory opposition should not be one of them."

Standard & Poor's equity analysts said in a research note that the two combined could achieve a larger share in the U.S. wireless industry, behind market leaders Cingular and Verizon Wireless, and would have "a leading share of the business market." A marker to watch is whether Nextel selects CDMA, the same third-generation, or 3G, platform as Sprint's, S&P analysts said.

Nextel 5.25s up 0.125 point

But, as the convert trader pointed out, skepticism is nagging many onlookers.

"The market loves the idea of a merger" between Nextel and Sprint, a sellside trader said. "But at least from the standpoint of the [convertible] bonds, we're waiting until something more definite is out there. Today, all the activity was in the stock, short-covering, that sort of thing."

While the consolidation theme is nothing new to the telecom field, he said, there have been more marriage proposals than actual wedding bells. Specifically, he noted the BellSouth and AT&T talks earlier this year that have come to nothing so far.

Thus, he said Nextel bondholders were timid about making any drastic moves in the paper. One sellside trader quoted the Nextel 5.25% convertible due 2010 up about 0.125 point to 101.125 bid, 102 offered, but another pegged the bid at 102.25. Nextel's junk bonds were similarly moved, with the 6.875% due 2013 seen up 0.25 to 0.75 point at 108.5

Nextel stock, however, saw lots of action, primarily in the way of heavy short covering by hedge funds, many of whom also happen to hold the converts. The stock soared $1.84 on the day, or 6.58%, to end at $29.81.

Tyco slips 1.5 points on swap

Tyco on Thursday raised its annual dividend payout eightfold, for an outlay of some $900 million, and reiterated expectations of strong financial results in 2005. The Tyco board approved an increase in the quarterly dividend to 10 cents a share, up from 1.25 cents.

Early in the session, a buyside trader said the Tyco converts -the 2.75% due 2018 and 3.125% due 2023 - both came in about 2.25 points on swap with the news. But they were soon lifted from that low point of the day, as the market digested the events. Both issues closed roughly off by 1.5 points on swap, as the stock gained 32 cents on the day, or 0.94%, to $34.40.

Some former holders of the Tyco paper, though, were glad to be rid of it.

"We thought that the dividend increase had been telegraphed by the company pretty clearly (e.g. management has continuously spoken about returning cash to shareholders, amended credit agreements to remove restriction on dividend increases late last year, etc.)," another buyside sources said.

"That, plus the tons of cash flow they are generating and the fact that there is basically no dividend protection in the bonds (i.e. there is a 10% dividend yield trigger before conversion ratio adjustment) led us to sell out of our position months ago."

Standard & Poor's said the change would have no impact on Tyco's BBB ratings or positive outlook. "The increase in dividends was largely anticipated, and we consider Tyco's new dividend policy as consistent, if not modestly conservative, compared to those of peer conglomerates."

"Tyco had a significant year of progress in 2004, with solid earnings and revenue growth, excellent cash flow and continued strengthening of our balance sheet, and we expect to continue this progress in 2005," Tyco chairman Ed Breen said in a prepared statement.

The company said it expects earnings from its continuing operations of 40 to 42 cents a share in the December quarter and $1.88 to $1.98 for fiscal 2005.

Delta issues up 1.5-2.75 points

Delta's bonds - both the convertibles and junk paper - jumped on rumors that the Atlanta-based carrier would issue new convertible bonds, which appeared to have been launched off high yield trading desks. The chatter could not be confirmed by several capital markets sources or buy-side sources in the convertible market, who are the first to receive new deal prospectuses.

"Is there a lack of airline convertibles?," one convertible fund manager remarked when asked it he'd heard about a new Delta convertible. "But when I feel this way, it is often good to be contrary! I would probably be in on a new deal subject to seeing onerous treatment of the equity (low premium), good coupon and short maturity."

Delta's 8% converts were quoted up 2.75 points to 66.75 bid, 68.75 offered at the close by one sellside shop, but another sellside trader put the issue at 66.25 bid an hour or so after the closing bell. The Delta 2.875% convert, though, was seen closing up 1.5 points at 69.875 bid, but later seen at 70.125 bid.

Delta shares ended Thursday off 8 cents, or 1.05%, at $7.52.

Delta's junk bonds were firmer, too, by about 1.25 points with the shorter paper in the low 90s.

Euronet plus 0.625 bid in gray

At the open, Euronet launched $100 million of convertible notes talked with a 1.5% to 2.0% coupon and 37% to 42% initial conversion premium for pricing after the close and buyside traders said the issue was bid 0.625 point over issue price late in the afternoon.

Euronet shares closed down $1.38 on the day, or 5.51%, to $23.68 but were up 11 cents, or 0.46%, in after-hours trading.

Leawood, Kan.-based Euronet, which provides electronic payment services, intends to use proceeds from the offering to reduce outstanding debt by about $54.3 million and the remainder for general corporate purposes, which may include share repurchases, acquisitions or other strategic investments.

Dress Barn goes to 104 bid

Dress Barn sold its small $100 million deal at par to yield 2.5% with a 30% initial conversion premium - aggressively outside of yield talk for a 2.75% to 3.25% coupon and at the aggressive end of premium guidance for 25% to 30%.

But it still went north from gray market levels of 3.75 points over issue price.

The new Dress Barn was last seen bid at 104 with an offer at 105, a buyside trader said.

Dress Barn shares closed Thursday off 13 cents, or 0.8%, to $16.04.

The Suffern, N.Y.-based retailer said proceeds would be used to finance a part of the cost of its previously announced acquisition of Maurices Inc. If that acquisition is not completed, Dress Barn said proceeds would go toward general corporate purposes.

On Nov. 19, Dress Barn announced plans to buy Maurices, which sells apparel and accessories for young women and men, for $320 million. In the acquisition does not go through by Feb. 28, 2005, the converts can be called at 102.

If Dress Barn's acquisition of Maurices Inc. is terminated, the notes may be redeemed in cash any time before Feb.28, 2005, at 102 plus interest; otherwise, the 20-year issue is non-callable for seven years.

Soitec euro issue finds interest

Soitec launched €90 million of convertibles talked at 4.125% to 4.625% with a 35% to 40% initial conversion premium and interest from buyside sources in the United States was piqued.

Alongside the convertible, Soitec is making an offer to buy back its €92.2 million outstanding of convertibles due November 2006 for €23.80 to €24.10, including accrued interest, representing an offer spread of 255-325 basis points.

Barclays convertible analysts Luke Olsen and Haidje Rustau said in a report that assuming a 500 basis points credit spread, a 350 bps borrow fee and no dividends over the life of the new convertible, they calculate the implied volatility at 35.7% on worst terms versus a share price of €5.20, "which we would consider expensive" versus our volatility estimate of around 33-34% based on historical volatility and taking into account a possible skew impact.

The new issue accounts for approximately four months' trading volume at current levels, the analysts said, therefore they think that "strike-pinning could be a factor with this issue and hence lower our volatility estimate to 32%. On best terms, the implied volatility improves to 30.3% which we would consider attractive."

However, given the small size of the issue, the analysts noted that future liquidity could be constrained. Additionally, the credit risk is high and might be difficult to hedge.

On an outright basis, the analysts said the new convertible could be an interesting alternative to Soitec shares. In addition to paying a coupon, versus no dividends for the stock, they pointed out that the bond has relatively high equity sensitivity compared to many other recent new issues, while at the same time providing some, albeit fragile, downside protection via the bond floor.

© 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.