XM Satellite slides on earnings; Quanta delays $125 million offering; Vitesse falls on restatements

By Kenneth Lim

Boston, April 27 - Earnings season is in full swing, and action in the convertible market was driven by a slew of results on Thursday.

XM Satellite Radio Holdings Inc. slid on an outright basis in line with a stock decline after the company reported a deeper first-quarter loss and said its marketing and billing practices were under federal investigation. The company told investors on a conference call that it had just been notified of the investigations and was trying to find out more information.

Amkor Technology Inc.'s convertibles stayed near to parity after the company reported strong results, adding to expectations that the company would be able to meet its obligations on those convertibles, which mature soon, or seek to refinance its debt.

Quanta Services Inc.'s existing 4% convertible due 2007 improved slightly on a tender offer. But the new convertibles that would have helped pay for the tender offer did not reach the market as early as expected Thursday as Quanta held off pricing its initially overnight $125 million offering of 3.75% convertibles due 2026 until after the market closed.

Meanwhile, Vitesse Semiconductor Corp.'s 1.5% convertible due 2009 was about five points lower on an outright basis as the stock crashed after the Camarillo, Calif.-based integrated circuit maker said it will restate three years of results following an earlier announced investigation into its stock option accounting practices.

The convertible was marked at 78.21 bid, 79.21 offered against the closing stock price of $1.82. Vitesse stock (Nasdaq: VTSS) closed lower by 27.49% or 69 cents.

A sell-side convertible analyst said of the stock's decline: "That kind of thing always surprises me...that was kind of the obvious conclusion to draw from the first press release they put out about a week and a half ago."

But the analyst said some investors could be hoping for a default event opportunity.

"If they say they're not going to file on time, there will be some hedge funds playing the 10-K-arb game, or whatever you call it, and try to muscle the company into some sort of payment for default on the basis of not getting the filings on time," the analyst said. "The problem with Vitesse is twofold. One is the indenture is written in such a way that favors Vitesse...and the other thing is that Vitesse is not the healthiest company, and there will be a question about whether they will be able to handle a cash put on the bonds."

"Both of those things probably give Vitesse a position of strength," the analyst said. "Oddly enough, having weak financials is actually helpful to them."

XM Satellite slides on loss, probe

XM Satellite Radio's convertibles were about a point lower on an outright basis in line with a drop in the stock after the company reported a wider quarterly loss and said its billing and marketing practices were under federal investigation.

XM's 1.75% convertible due 2009 was marked at 80.35 bid, 80.85 offered against the closing stock price of $20.80 on Thursday. Its 8.25% convertible due 2012 was 40.2 bid, 41.2 offered at the same stock level. XM stock (Nasdaq: XMSR) ended lower by 5.5% or $1.21.

Washington-based XM on Thursday reported a first-quarter loss of $151.4 million, or 60 cents per share, from $122.1 million, or 58 cents per share, in the year-ago period, despite revenue doubling to $208 million from $102.6 million. But the company's cost of adding new subscribers to its satellite radio service shrank to $94 per subscriber from $141 in the fourth quarter of 2005. Year-on-year, the average cost rose from $90.

XM also said the Federal Trade Commission is investigating whether XM is complying with the Telemarketing Sales Rule and the Truth in Lending Act. The Federal Communications Commission also told XM that a transmitter on one of its satellites does not meet emissions standards. XM said it was conducting its own probe.

XM chief executive Hugh Panero said he believed the company was complying with marketing rules, and the company said it was cooperating with the inquiries.

In contrast to the jittery equity investors, convertible holders were more comfortable after the results with XM managing to lower its average marketing costs.

"We're bullish on XMSR," said a New York-based convertible fund manager. "The company has established a growing and defensible business. XMSR may encounter challenges on the road to profitability, and the stock may swoon! But we're confident that the 1.75% convertible bonds are money good."

At a market value of 83, the 1.75% convertible gives a 7.2% yield to maturity, and the bonds mature in just over three years, in December 2009.

"The company has a lot of cash and only a bit over $1 billion in debt, and the stock market cap is still over $5 billion, so there's a big cushion of equity protecting the debt," the fund manager said. "And the stock is volatile. It could easily overcome the 100% conversion premium between now and the end of 2009."

Amkor could refinance converts

Amkor convertibles continued to stay near to par as the company reported strong earnings that boosted confidence that the semiconductor testing and packaging company would refinance its debt.

The Amkor 5.75% convertible due in June this year and the 5% convertible due in March 2007 remained around 99 bid, 99.5 offered on Thursday, even with the Amkor stock (Nasdaq: AMKR) rising 12.67% or $1.40 to $12.45.

"My feeling is that it's a dead trade," said a sell-side convertible trader. "The people who are in it are in it because of the yield. I don't think people are going to pay beyond that."

Amkor said late Wednesday that its first-quarter profit was $35.7 million, or 20 cents per share, from a loss of $119.1 million, or 68 cents per share, a year ago. The Chandler, Ariz.-based company is also expecting a profit of 24 cents to 28 cents per share in the second quarter.

"The results were certainly good, so it's not a surprise therefore that you see the stock up," said a convertible analyst.

But the analyst said the question remains whether the demand that Amkor is reporting can be sustained for the rest of the year and into next year, "because if not it would make their refinancing plans more difficult to achieve."

"Their business has ramped up, the increases are just so huge that you have to look at it with a little bit of skepticism," the analyst said.

In the meantime, Amkor has "plenty of liquidity" on its balance sheet to take out both convertible series, but the company has indicated it is likely to tap the capital markets to refinance its existing debt with a mixture of convertible and straight bonds, the analyst said.

The sell-side trader said he would not be surprised to see Amkor come to the market with new deals, saying "the company has a history of doing just that."

Quanta Services delays $125 million deal

Investors expecting Quanta Services' new $125 million of convertible notes on Thursday before the market opened had to wait until after the bell for the final terms to be set.

Meanwhile, the 20-year, 3.75% convertible subordinated notes with an initial conversion premium of 35% were seen bid at 97 in the gray market on Thursday. They had been talked at a reoffered price of 98.25.

There is also a greenshoe option for a further $18.75 million.

Quanta's existing 4% convertible subordinated notes due 2007, which will be tendered for using the deal proceeds, were seen about a point higher as the credit tightened, said a sell-side convertible trader.

The 4% convertibles were marked at 98 bid, 99 offered against the closing stock price of $16.18 on Thursday. Quanta stock (NYSE: PWR) closed lower by 2.53% or 42 cents.

The initially overnight deal was to have been finalized on Thursday before the market opened, but the reoffer price was only set in Thursday evening.

Credit Suisse, Bank of America and JP Morgan are the bookrunners of the Rule 144A deal.

The trader was not surprised that the deal had to be reoffered, saying the terms without the discount were too aggressive.

A New York-based convertible analyst said there was no clear benchmark for rating the credit spread of the new convertibles, because Quanta Services "doesn't really have any other debt outstanding that would give you and indication of what spreads to use."

But the new convertibles could be attractive at the reoffered price, the analyst said.

"It's a nice juicy coupon, which obviously the market likes, and it has all the features that hedge investors like, so I would imagine that there wouldn't be too much trouble getting the deal done," the analyst said.

Houston-based Quanta Services provides specialty network contracting services to the electric power, gas, telecommunications and cable television industries.

© 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.