Russ... just finished reading a pretty important piece on convertible debentures...Elan, one of your favs was mentioned.
Regards,
Frank P.
----------------------------
CONVERTIBLE CORNER: Facing Another Redemption Day
By Tom Barkley -- Of DOW JONES NEWSWIRES
NEW YORK -- The convertibles market started 2002 under the cloud of the much-hyped "looming put crisis," in which billions of dollars in redemptions threatened to hit issuers and investors alike.
Large cap issuers had been lured to the market en masse the year before to replace commercial paper with the new zero-coupon, contingent convertible securities. But with their stocks on a bear run, these companies soon found they faced a likely redemption of the so-called CoCo securities, which typically included an option for investors to put, or sell back, the notes a year or two after issuance.
But in fact, as many market participants predicted, the flexible nature of convertibles enabled many issuers to restructure their short-dated securities to at least temporarily put off redemption day.
Of the $16.6 billion in potential puts that have come due so far in 2002, $8 billion, or less than half, have been redeemed, according to Lehman Brothers.
Incentives offered by companies to persuade investors to hold onto the bonds - ranging from one-time payments to adding an additional put date - kept another $5.1 billion in the market. The other $3.5 billion convertibles were in the money and stayed outstanding.
But the storm hasn't passed. Instead, the risk of redemptions has increased substantially with the prolonged slide in stocks. Meanwhile, some companies' ability to refinance their puts has been hampered, as the unprecedented number of credit blowups limits access to capital markets and even new bank loans.
"Every parameter has worsened," said Venu Krishna, head of U.S. convertible research at Lehman Brothers. "What that means is that companies are in a situation where they have less wiggle room in addressing the issue, and companies and investors alike have to plan well in advance on how to deal with the situation."
Not only has the amount of potential puts jumped to $26.6 billion through 2003, but more worrisome is Krishna's contention that the amount of bonds that are likely to be redeemed has jumped threefold to $21.3 billion - or 80% of the total.
A stock market rebound could allow some companies to avert a big redemption by giving investors an incentive to hold onto the convertibles.
"But for many companies, there's practically nothing you can do to prevent the put from being exercised, so you have to plan in advance," said Krishna.
Still, he and other market participants are careful not to overstate the threat the puts pose to the market.
"You shouldn't hype it up too much," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank. "There's no systemic risk to the convertible market, but on an individual basis, there are some companies that will have to do some pretty fancy footwork to deal with the puts."
Whose Put At Risk?
A portfolio manager of a convertible hedge fund says his fund only invests in zero-coupon bonds of issuers that don't have credit problems, and he thinks many of the more troubled credits, such as Tyco International Ltd. (TYC) and Solectron Corp. (SLR) are held by distressed or more credit-oriented investors.
Like others, he doesn't view the put situation with too much concern.
"There are some credits that have a lot of risk, but I don't think there will be broad-based problems," the money manager said. "The only concern I have is that a lot of product will be coming out of the market, so there will be a lot of dollars facing few securities," he added.
Tyco is one of three issuers facing two puts next year, along with Omnicom Group Inc. (OMC) and Pride International Inc. (PDE). All three fall in Lehman's high-risk category, with their stocks well below the point where investors would find it more attractive to hold onto the convertibles.
But only Tyco presents a big concern from a refinancing standpoint, though the spinoff of CIT Group in July boosted the company's cash balance to around $6.5 billion by the end of September.
"The top of the list by miles is Tyco," said Howard. "The future of the company hinges on negotiating these two puts."
Tyco faces a redemption of $2.3 billion in February on its zero-coupon bond due 2021, which can be settled in cash or stock. But another $3.6 billion of its zero-coupon bond due 2020 will likely be redeemed next November, and that has to be paid in cash.
A Tyco spokesman referred questions about the puts to the company's fiscal fourth-quarter conference call held Thursday.
On that call, Edward Breen, chairman and chief executive, said the company plans to pay cash for the first put, though he declined to go into further details. He said the company is discussing the issue with its bank group, and reiterated that he expected to have a bank agreement in place before the credit lines mature in February.
But Howard said Tyco's situation is one which is widely know, and which investors have "already placed their bets on.'
The more dangerous situations are puts that investors may be more complacent about, he said, such as the one facing Elan Corp. PLC (ELN).
Elan's put doesn't come due until December 2003, when as much as $1.01 billion of its zero-coupon note due 2018 can be redeemed for either cash or stock. But the struggling Irish pharmaceutical company had only $600 million in cash at the end of September, and the stock would have rise to $44.25 from its current level of $1.41 to avoid a put, according to Lehman's analysis.
Deutsche's equity analyst thinks the "put could take the company down," says Howard. "And if it settles the put in equity that could put them into a death spiral."
An Elan spokesman said the company is reviewing its options regarding the convertible, referring to the company's third-quarter update at the end of the summer, when it said it may seek to raise capital or repurchase, restructure or refinance its debt.
-By Tom Barkley, Dow Jones Newswires; 201-938-4385
online.wsj.com |
