DJ Wariness Over Wireless No Block To Nextel $1 Bln Convert
24 May 08:15
(This article was originally published Wednesday)
By Christine Richard
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Nextel Communications Inc. (NXTL) priced $1 billion in
convertible bonds Wednesday, garnering surprisingly strong demand amid
nervousness over the wireless telecommunications sector.
Intense competition and heavy indebtedness among wireless telecommunications
companies have dragged down both stock and bond prices in the sector since the
beginning of the year.
But the swift sale of the Nextel offering, announced late Tuesday and
effectively sold before the market opened Wednesday, underscored the company's
relatively strong liquidity and competitive position, analysts said.
It also highlighted the importance of the convertible market as a funding
vehicle for speculative grade companies such as Nextel, given that such
companies are seen to have limited access to straight debt and equity markets.
The convertible senior notes, which mature in 2011, pay a coupon of 6% and
carry a conversion price of $23.84 per share. Convertible bonds are hybrid
instruments that allow investors to buy debt that can be turned into equity.
Neither Nextel nor lead underwriter Morgan Stanley could comment on the
transaction which was sold as a private placement.
No Shortage Of Cash
Analysts say the Nextel convertible's appeal lies in the company's enviable
cash reserves and profitable customer base.
Jeanine Oburchay, a convertible bond analyst at First Union, said Nextel now
boasts a sizable war chest, a rarity for many telecommunications companies..
Wednesday's issue increased Nextel's liquidity position to $7 billion,
Oburchay reckons.
She expects the company will burn through $3 billion before starting to
generate positive cash flow in the middle of next year. That still leaves
Nextel with a$4 billion cushion, far from the just-scraping-by levels that
have seen a number of telecommunications companies pushed to the brink or over
the brink into insolvency.
Keith Ban, wireless analyst at Fitch in Chicago, said that while the
convertible issue raised the company's debt level, which stands at around $12
billion, it also underscored Nextel's ability to tap the market.
"The company clearly has great access to the capital markets, which is a
testament to its strength," said Ban.
Fitch assigned the convertible bond a B-plus rating with a stable outlook.
Relative Strength
In addition to its superior cash position, Nextel has a solid competitive
position.
Using a key measure of success in the wireless business - average revenue per
unit - Nextel is a standout. The company generates $70 on average compared to
an industry standard of around $50, Oburchay said.
Ban agreed that the company is a relatively strong player with a highly
attractive customer base but stressed that the competition is keenly focused on
stealing Nextel's valuable customers.
But the success of Wednesday's convertible deal wasn't attributed solely to
expectations that Nextel is set to shine.
Hedge funds, which arbitrage the price of a convertible versus other
outstanding securities, are likely to have been major participants in the
offering.
One such arbitrage player, Alexandra Investment Management Limited, bought
the convertibles in the secondary market.
"We compared outstanding instruments to new issues and decided it was cheaper
based on theoretical assumptions," said Vadim Iosilevich, a principal with the
firm.
As a result, the firm is long the new convertible bond and short Nextel
common stock, a position that gives them a long volatility position.
"We can effectively provide relatively good performance regardless of the
direction of the market," said Iosilevich. "The higher the volatility, the
better it is for arbitrage positions."
Alexandra Investment Management generated returns of 18.4% last year on such
strategies and has returned 13% year-to-date, according to Iosilevich.
-By Christine Richard, Dow Jones Newswires; 201-938-2189;
christine.richard@dowjones.com
(END) DOW JONES NEWS 05-24-01
08:15 AM |
