The market is HOT HOT HOT...LOL
By Jonathan Stempel
NEW YORK, May 8 (Reuters) - Taking advantage of a white-hot market for convertible bonds, Verizon Communications Inc. <VZ.N> is expected overnight to privately sell $3 billion of the bonds, market sources said on Tuesday, in the third largest such sale ever conducted in the United States.
Bermuda-based conglomerate Tyco International Ltd. <TYC.N>, which sold $3.45 billion of the bonds late last year, has completed the biggest sale, according to ConvertBond.com, a Web site maintained by Morgan Stanley.
Based in New York, Verizon, the No. 1 U.S. local phone company, joins a slew of companies -- at least 21 in the past two weeks -- to sell convertible securities.
These are an obscure but increasingly popular stock-bond hybrid that usually offers current income, can be converted into company stock, and whose fortune is closely tied to the underlying stock price.
"The market is hot," said Catharina Kusuma, a director in convertibles research at UBS Warburg LLC in Stamford, Connecticut. "Obviously, they have funding requirements, and they may consider this the best way to tap the market right now."
Indeed, many companies are finding the securities, and the low yields they carry, an attractive way to raise cash at low cost, at a time companies are rapidly selling all sorts of bonds to take advantage of a strong market.
On Wednesday, for example, WorldCom Inc. <WCOM.O>, the No. 2 U.S. long-distance phone company, is expected to sell up to $12.3 billion of bonds in the largest bond sale ever conducted by a U.S. company.
Verizon is expected to sell 20-year zero-coupon bonds, which pay no regular interest. The bonds are expected to yield 3 percent to maturity, and be convertible into Verizon common shares at about $69.50, a 25 percent premium over the shares' Tuesday closing price on the New York Stock Exchange.
In comparison, Verizon's existing 7.25 percent 10-year notes on Tuesday yielded about 6.7 percent, a trader said.
NEW WRINKLE
So far this year, there have been about 70 convertible securities sales totalling $34 billion, according to ConvertBond.com. Of these, 32, totalling $18.6 billion, involved zero-coupon bonds. Hedge funds favor these, and use them in complex trading strategies.
Kusuma said the basic terms of Verizon's bonds are already more investor-friendly than many of the zero-coupon bonds sold recently, because of their higher yield to maturity and lower conversion premium, though they have a bondholder-unfriendly "contingent conversion" feature.
But these have yet another wrinkle.
Though a contingent conversion feature requires a holder to wait until the underlying shares trade above the official conversion price, in this case 20 percent, for a period of time, this provision falls away if Verizon's shares fall below 95 percent of the original offering price.
Thus, if the offering price were $55.60, the contingent conversion feature would disappear if Verizon's shares were to fall below $52.82.
This could make it easier for Verizon to sell its bonds, despite the gigantic size of the issue.
Indeed, Kusuma said, "the zero-coupon, high premium structure has been digested easily."
Verizon shares' 52-week closing high is $58.75, set last December 6. Their 52-week closing low is $40.06, set last August 17. Verizon cannot call the bonds away for five years, and bondholders may "put," or return, the bonds to Verizon after three, five, 10 and 15 years.
Credit rating agency Moody's Investors Service rates Verizon's existing senior debt "A1," its fifth highest investment grade. Another agency, Standard & Poor's, rates it a roughly equivalent "A-plus."
Goldman Sachs & Co. is arranging the sale, the market sources said.
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