CONVERTIBLE CORNER: Mkt Gives Lucent Preferred Seating
01 Aug 17:40
By Tom Barkley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Lucent Technologies Inc. (LU) may be a fallen angel to
equity and bond investors, but the struggling telecom equipment maker rose like
the mythical phoenix in the convertibles market Wednesday.
Lucent quickly got much of the financing it needs to fund its massive
restructuring plan, pricing an upsized $1.75 billion worth of 30-year
convertible preferred securities a day earlier than was planned due to heavy
demand. It was originally seeking $1 billion in proceeds from the offering.
Despite serious credit concerns surrounding formerly investment-grade rated
Lucent, whose debt was sent deeper into junk status by rating agencies even as
the company was shopping the deal, convertible investors felt the terms were
too good to pass up.
"Yes, we're buying Lucent, and yes, we're buying it in large blocks," said
Maren Lindstrom, convertible portfolio manager at Lord Abbett & Co., which is
one of Lucent's biggest shareholders with over 12 million shares, a 3.6% stake.
Even after the terms tightened during price talk, they only went from being
"outrageously" cheap to "very" cheap, says Cathrina Kusuma, director of
convertible research at UBS Warburg.
The securities pay a dividend of 8.0%, on the low end of price talk that was
revised lower. It was originally expected to price with a dividend of 8.5% to
9.0%, said sources familiar with the private placement.
The conversion premium, which measures how much the stock has to rise before
conversion becomes profitable, was raised at the time of pricing to 22% from a
previously low 16% to 20%, the sources said.
The offering was said to be well oversubscribed, with the securities trading
up as much as 3 points in premarket activity, sources said.
Another sign of the deal's popularity was the selling pressure of Lucent's
stock Wednesday amid unusually heavy volume, which analysts say indicated
hedge-fund demand, in part. The stock closed down 57 cents at $6.13.
"The price talk was at an extremely attractive level for both hedge funds and
outrights," or investors who buy and hold onto the securities in their
portfolios, said Kusuma, adding that she was surprised it priced so quickly.
Risky But Profitable
The bottom line on the deal was that, even if the stock doesn't move higher,
investors could make up the higher premium they're paying for the convertible
preferreds in a little over two years with the income they'll be getting from
the dividends. That's well before the company can call, or buy back the bonds,
in five years.
Hedge funds, in particular, like such scenarios because they can put on a
bigger hedge to protect themselves from a fall in stock price.
Investors could also put, or sell back, the securities in years three, six,
nine and 15 at par, an added protection.
"Assuming that Lucent doesn't default on the bonds in two years, and you're
hedging the stock, then you're really looking at a home run," said Jonathan
Cohen, vice president and director of convertibles research at Deutsche Bank.
Hedge funds typically trade convertible securities - which are fixed-income
instruments that can be converted into stock - by buying the convertible and
shorting the stock.
Despite the seeming euphoria over the offering, however, analysts said the
deal was priced so cheaply because of the amount of uncertainty surrounding
Lucent.
"Many outrights probably won't want to take the credit risk here," said
Cohen.
Lucent's debt rating has tumbled since it lost its investment-grade status in
June, as market conditions have continued to deteriorate and the company has
had trouble raising the cash necessary for its restructuring plans.
On Wednesday, Moody's cut Lucent's debt two notches to Ba3 from Ba1, a day
after a similar move by Standard & Poor's, which sliced its rating to
double-B-minus from double-B-plus.
The convertibles will be rated B3 by Moody's and single-B-minus by S&P.
Lucent needs to amend its credit facility to go forward with Phase II of its
restructuring plan, which it said last week would result in a $7 billion to $9
billion restructuring charge in the current quarter.
Moody's and S&P will keep Lucent's rating on review for possible downgrade
until the company reached a new agreement with its bankers. Moody's rating was
dependent upon the successful sale of the convertibles, as well.
Lucent also must raise at least $2.5 billion to complete its spin-off of its
Agere Systems Inc. (AGRA). Under proposed credit facility amendments filed by
Lucent Wednesday with the Securities and Exchange Commission, the company would
have to raise a significant amount of additional liquidity to sell its
remaining Agere stake.
In the filing, Lucent said it expects to generate a "substantial" portion of
the required liquidity by selling its optical fiber business, its Oklahoma and
Ohio manufacturing operations, and its convertible preferred stock offering.
"This funding is likely to fill up the remaining funding gap they have given
current restructuring plan," said Kusuma, noting that cash accounts for $2
billion of the charges.
Cash Isn't King
Beyond concern about Lucent's financial conditions, convertible investors
were also worried about covenants in the current credit facility that would
prohibit holders of the securities from being paid their dividends in cash.
In Wednesday's SEC filing, Lucent said it was seeking consent to pay cash
dividends on its preferred stock. Otherwise, investors would be paid in stock.
In a conference call with institutional investors Wednesday, a Lucent
spokesman expressed what one investor called a "fairly high level of
confidence" that banks would allow for dividends to be paid in cash, and that
it will be resolved "fairly quickly."
But the investor, a hedge fund manager, said he wasn't too concerned about
the restriction, saying, "we'll get our money in one form or another."
Lucent spokeswoman Michelle Davidson declined to comment on the convertible
offering. She also declined comment on the specifics of the credit facility,
saying only that Lucent believes it will be able to amend it.
-By Tom Barkley, Dow Jones Newswires; 201-938-4385
tom.barkley@dowjones.com
(END) DOW JONES NEWS 08-01-01
05:40 PM |
