Flextronics, Doral Financial drop; Amkor raises guidance; IPC launches new mandatory

By Rebecca Melvin

Princeton, N.J., Oct. 26 - A couple of big moves in convertible names on Wednesday left hedge players relatively unscathed, but outright players would have been hurt by the tumbles. Most trading was focused on earnings news, traders said.

The convertibles of Flextronics International Ltd. came in about 7 to 7.5 points on a hedged basis as its stock lost 24% after the contract electronics manufacturer reported a quarterly loss, guided forecasts lower and suffered a downgrade by Credit Suisse First Boston to "neutral" from "outperform."

The convertible preferreds of Doral Financial Corp. tumbled along with its common shares after the San Juan, Puerto Rico-based financial holding company unleashed a slew of bad news, not the least of which was further delays in getting its financial statements out, which points to possibly bigger accounting issues than originally expected, sources said.

Doral also cut its common dividend and said that a regulatory probe of its accounting practices had been upgraded to a formal investigation. The preferreds were indicated lower by 10 to 15 points.

In other news, Amkor Technology Inc.'s earnings report after the close included a three-part financial plan, including the private placement of $100 million of convertible subordinated notes, the proceeds of which are expected to be used to purchase a portion of Amkor's 5.75% convertible subordinated notes due June 1, 2006, the company said in its release. The private placement of convertibles will be subscribed by Amkor's chairman and chief executive, James Kim, the company said.

More importantly than Amkor's most recent quarter, which marked an improvement for the semiconductor company, was its guidance for the fourth quarter, a New York-based research analyst said.

The company said it expects to see a sequential revenue increase of 6% to 8%, gross margin of 19% to 20% and earnings in the range of two cents a diluted share net income to a two cents a diluted share net loss. Management said that limits on growth will be due to capacity constraints rather than demand.

Other convertible names trading Wednesday included Lucent Technologies Inc., Chiron Corp., Lear Corp. and School Specialty Inc., which were all lower. CV Therapeutics Inc. also traded, with its 3.25% higher by about 2 points.

In the primary arena, IPC Holdings Inc. launched an offering of 11 million mandatory convertible preferred shares, which it expects to price on Nov. 1 after the close, according to a syndicate source.

The issue, the amount of which will be based on the stock price at pricing, will be sold via bookrunners Morgan Stanley and Citigroup, with Wachovia as joint lead manager, and co-manager Keefe Bruyette & Woods.

The shares were talked to yield 7% to 7.5% for the coupon, with an initial conversion premium of 18% to 22%. The shares will mature in three years.

Concurrent with the preferred offering, the company will issue 12 million common shares, with a 1.2 million share greenshoe.

The mandatory preferreds, which typically don't appeal to hedge investors, have dividend and takeover protection.

The Bermuda-based reinsurance company plans to use proceeds to provide additional capital for reinsurance operations and for general corporate purposes.

Flextronics bonds hold for hedge players

The 1% convertibles of Flextronics fell more than 11 points on an outright basis and were in about 7 to 7.5 points on a hedged basis after the Singapore-based company posted a loss for its fiscal second quarter of $2.4 million, compared with profit of $92.6 million in the year-ago quarter. Revenue fell to $3.88 billion from $4.14 billion.

The electronics company said the decline was largely due to sale of Flextronics' semiconductor and network services divisions and the sale of cell phone businesses by two large customers. Excluding items, Flextronics missed estimates by two cents a share.

More importantly, however, Flextronics said it expects earnings and revenue to fall below previous estimates for the current quarter due to softer-than-expected demand going into the holiday sales period.

While the stock plunged, the convertibles "did what they were supposed to do" and they held in there even as the stock slid lower, a Connecticut-based buyside source said.

The credit spreads widened a bit to about 170 to 180 basis points from about 140 bps before the news on Tuesday; but nevertheless, hedge players "didn't do too badly, but outrights got screwed," a New York-based sellside trader said.

"The credit widened and it cheapened up a little," said another sellside source.

"This was definitely the exception. Not too many trades have worked out well recently, but this one did," the buysider said.

The 1% Flextronic convertibles traded at 87.75 versus a share price of $9.50, compared to 97 versus a share price of $12.10 on Tuesday.

Flextronic shares closed lower than the level of reported convertibles trades at $9.20, down $2.90, or 23.87%.

Doral sees further delays, accounting issues

The 4.75% Doral Financial convertibles were seen lower by almost 15 points after the company slashed its dividend on its common stock and said that it wouldn't be able to meet deadlines for financial filings including its 2004 annual report by Nov. 10.

Doral said that due to new information regarding its mortgage loan sales to local financial institutions it no longer expects to be able to file its amended 2004 annual report (form 10-K) by Nov. 10.

The information may impact the accounting treatment of some or all of these transactions as "sales" under financial accounting standards, the company said.

"In the event that the company determines that a transaction does not qualify as a 'sale' for accounting purposes, the company would record the transaction as a loan payable secured by mortgage loans and reverse the gain previously recognized with respect to such transaction," Doral said.

The company also said that the U.S. Securities and Exchange Commission has opened a formal investigation in connection with its restatement of consolidated financial statements.

The SEC has issued a subpoena that deals primarily with restatement and related financial reporting matters and the terms of certain transactions with local financial institutions, Doral said in a release.

The two main aspects of this news, a Connecticut-based research analyst said, are the additional delay in getting its financials out and the cut of the dividend. "It makes you ask why," he said.

Initially the regulatory probe, which began earlier this year, had to do with valuing the residual pieces of its securitizations, the research analyst said. "Now it has to do with whether these were true sales and it's potentially a much larger problem."

The cut in the dividend also raises questions. Is the move due to the balance sheet or a current cash flow problem? the analyst said.

As previously announced, the company's preferred shares are subject to delisting from the Nasdaq Stock Market as a result of Doral's inability to file its quarterly reports for the first two quarters of 2005 by Nov. 1. But because these shares trade over the counter as well, that is less of an issue.

If the Nasdaq proceeds with this delisting, the company intends to seek a re-listing or alternative listing of its preferred shares as soon as possible after the completion of the restatement and the publication of its delayed reports.

The company reported that, at a regularly scheduled meeting held on Oct. 25, the board of directors voted to declare a dividend of $0.08 per share on the company's common stock payable on Dec. 2 to holders of record as of the close of business on Nov. 15. This dividend represents a reduction of approximately 56% from the previous quarterly dividend.

Doral is the largest residential mortgage lender in Puerto Rico and the parent company of Doral Bank, a Puerto Rico-based commercial bank, Doral Securities, a Puerto Rico-based investment banking and institutional brokerage firm, Doral Insurance Agency, Inc. and Doral Bank FSB, a federal savings bank based in New York.

The 4.75% preferred shares traded early at 125, which was approximately its level on Tuesday, and later they were indicated lower at about 111.50 bid, 116.50 offered.

Its shares fell $2.25, or 20.36%, at $8.80.

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