Covad surges on takeover; Countrywide adds to gains; Ceradyne up ahead of earnings; Champion's big premium

By Evan Weinberger

New York, Oct. 29 - Covad Communications Group Inc. convertibles had a spring in their steps Monday after a private equity firm agreed to buy the struggling telecommunications firm.

Countrywide Financial Corp. convertibles continued their rise from Friday, although the stock was down as analysts cast a critical eye on the mortgage lender's fourth-quarter forecast.

Ceradyne Inc. had a big day in the run-up to its third-quarter earnings report Tuesday. In the tech sector, Xilinx Inc. and Nortel Networks Corp. convertibles both had sizable rises Monday.

Analysts and traders reported a wary market. It may have also been a weary market, one analyst said. "I think there's some of that, some people waiting to see what the Fed does," he said. "All the Boston Red Sox fans didn't show up to work because they're hung over."

The launch of one new issue crossed the wires Monday morning and is set to hit the trading desks Tuesday morning. Champion Enterprises, Inc. launched $130 million in convertible senior notes due Nov. 1, 2037 Monday before the market open. The convertibles are talked at a 3% to 3.5% coupon and an initial conversion premium of 73% to 77%.

There is a $19.5 million over-allotment option on the registered transaction. The convertibles are scheduled to price Monday after the close.

The convertibles carry hard call protection until Nov. 1, 2012. There are investor puts on Nov. 1 in each of 2012, 2017, 2022, 2027 and 2032. The convertibles have dividend protection, a change-of-control put and a contingent debt agreement. The convertibles come with a warrant agreement, which caught the eye of at least one fund manager.

Champion is an Auburn Hills, Mich.-based producer of manufactured homes and commercial buildings. Champion plans to use the proceeds to repurchase notes due 2009, to pay off debt incurred under a term loan due 2012 and for general corporate purposes.

Equity markets were tepid as well Monday as market players awaited the two-day Federal Reserve meeting set to begin Tuesday. Many hope for, and expect, a further rate cut on the heels of the 50 basis point cut in September. Worrying oil prices and inflation fears may leave those hopes dashed.

The Dow Jones Industrial Average gained 63.56 points, or 0.46%, to close at 13,870.26.

The Nasdaq picked up 13.25 points, or 0.47%, for a 2,817.44 close. The Standard & Poor's 500 gained 5.70 points, or 0.37%, for a close of 1,540.98.

Volatility to drive Champion

In a nervous credit environment, analysts and traders have been looking for relatively low conversion premiums on new issues. That, they said, would entice investors to buy in even if they felt a little anxious.

Champion, on the other hand, decided to roll in with a conversion premium of 73% to 77% on its new convertibles that are scheduled to price Monday night.

"It is a very high premium. The only savior here is that it's a very high-vol name," one analyst said. "The stock's at $13 right now, so a strike would be at around $22. The only reason they're getting away with that is because of the vol."

A quick look at stock closes for Champion (NYSE: CHB) since the end of July shows a violently jagged line straight through Monday.

There is one other enticement on the Champion convertibles, however. "The warrants give you a higher delta than the premium would suggest," a fund manager said. "It models 7% cheap or so and the stock is down hard today from a 52-week high. It is likely the bonds will do OK."

Champion stock landed with a thud Monday, dropping $1.52, or 11.66%, for an $11.52 close.

Covad up on buyout

San Jose, Calif.-based Covad agreed to a $1.02-per-share buyout by Platinum Equity on Monday. The deal, which is set to close in the second quarter of 2008 once it gets regulatory and shareholder approval, is worth a reported $304 million.

That was music to investors' ears. The company's stock soared, and its convertibles followed suit.

"I'm not sure what the status of the convertibles will be after the acquisition takes place though," one market watcher said. "They may be rising toward par expecting them to be redeemed."

Covad's 3% convertible senior notes due March 15, 2024 closed Monday at 96.99 versus a closing stock price of $0.91. They closed Friday at 88.9 versus a stock price of $0.64.

Covad stock (Amex: DVW) gained 27 cents, or 42.17%, on the day as investors tried to get in on the bottom floor of the deal.

Countrywide convertibles gain

Calabasas, Calif.-based Countrywide's convertibles managed to add to their gains from Friday, when America's largest mortgage company announced a sunny outlook for the fourth quarter despite a $1.2 billion loss it took in the third.

Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Monday at 89.93 versus a closing stock price of $16.83. They finished Friday at 87.9 versus a stock price of $17.30.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Monday at 87.16 versus a stock price of $16.83. They closed Friday at 85.112 versus a stock price of $17.30.

Stock players weren't quite as sold on Countrywide's forecast, as skepticism about Countrywide's forecast began to emerge.

Countrywide stock (NYSE: CFC) lost 47 cents, or 2.72%, on Monday.

Ceradyne up on earnings

Costa Mesa, Calif.-based Ceradyne saw its stock and convertibles surge Monday, a day prior to the firm's earnings call. The hope expressed in trading was not without merit, as one of Ceradyne's big products is body armor. In fact, the firm was recently awarded a $49.2 million Army contract for more body armor.

Ceradyne's 2.875% senior subordinated convertible notes due Dec. 15, 2035 closed Monday at 132.936 versus a closing stock price of $69.71. They finished Friday at 129.735 versus a stock price of $67.70.

Ceradyne stock (Nasdaq: CRDN) closed Monday up $2.01, or 2.97%.

Xilinx rides semiconductor wave

The Semiconductor Industry Association announced a 5.9% jump in sales for September on Monday, according to an Associated Press report.

That news helped to send up San Jose, Calif.-based programmable logic device producer Xilinx's stock and convertibles Monday. Recent positive analysts' reports helped as well.

Xilinx's 3.125% convertible junior subordinated debentures due March 15, 2037 closed Monday at 94.95 versus a closing stock price of $24.50. They finished trading Friday at 93.545 versus a stock price of $24.24.

Xilinx stock (Nasdaq: XLNX) gained 26 cents, or 1.07%, on Monday.

Nortel up

Toronto-based telecommunications firm Nortel saw its convertibles and stock move higher on Monday.

Nortel's 1.75% convertible senior notes due April 15, 2012 closed Monday at 83.8706 versus a closing stock price of $17.36. They closed Friday at 81.9249 versus a stock price of $16.30.

Nortel's 2.125% convertible senior notes due April 15, 2014 closed Monday at 82.161 versus a stock price of $17.36. They finished Friday at 79.8539 versus a stock price of $16.30.

Stock in Nortel (NYSE: NT) leapfrogged $1.06, or 6.50%, on Monday.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.