Mercury Interactive solicits consents; Comverse lower, CSG firm on acquisition; Apria lower

By Rebecca Melvin

Princeton, N.J., Oct. 7 - The convertibles of Mercury Interactive Corp. traded in opposite directions Friday after the software company said it would solicit consents from holders of two convertible bond issues that are subject to a technical default this month.

In order to keep the bond issues outstanding, and in each case requesting a limited waiver of any default action related to late financial filings until March 31, 2006, the company has offered bondholders a sweetener worth 7.5 points for the 0% senior convertible notes, of which there is $500 million principal amount outstanding, and worth 1.5 points for the 4.75% convertible subordinated notes, for which there is $300 million principal amount outstanding.

Also trading in opposite directions Friday were the convertibles of Comverse Technology Inc. and CSG Systems International Inc. after Comverse unveiled plans to purchase a piece of CSG for $212 million.

Meanwhile, the convertibles of Apria Healthcare Group Inc. traded lower after the home-health care company cut its revenue and earnings outlook for the third quarter and full year 2005.

And as fears intensified regarding a potential bankruptcy filing from troubled auto-parts supplier Delphi Corp., General Motors Corp. continued to trade mixed for a second straight session, with the 6.25% convertible bond extending gains in heavy volume, while the 5.25% and 4.50% convertibles moved lower. On Thursday, the 5.25% convertible closed lower and the 4.50% moved higher.

The convertibles market quieted early Friday ahead of an early 2 p.m. ET closing of bond markets and ahead of Columbus Day, which will mean a long holiday weekend for some, but not others, traders said.

"I'll be here; a lot of credit guys will be out, but I'll be here," a New York-based sellside trader said.

Mercury Interactive trades mixed

The 0% Mercury Interactive convertibles traded slightly lower Friday, while the 4.75% convertible gained to slightly more than par after the business technology optimization software company said it was offering a consent fee of $15 for each $1,000 in principal amount of the 4.75s and $75 for each $1,000 in principal amount of 0s, in each case in which holders provide a consent.

Convertibles players expected that holders would agree to the sweetener for the 4.75% notes but not for the 0% bonds.

"It's not enough," a New York-based sellside trader said of the 0% paper's sweetener. "The stock went down from about $40 last week to $30, and I've heard people say they need 12."

The 0% convertible, which doesn't have any income and is due at a later maturity, is viewed as riskier than the 4.75% paper, a convertibles analyst said, but he disagreed that 12 points was necessary for holders to accept the offer, citing the company's solid credit quality.

Meanwhile, the wording of the Mountainville, Calif.-based software company's consent solicitation seemed to raise concerns. The company said in its release that the record date for determining the holders who are entitled to consent is Oct. 7.

The wording threw into question who is eligible for the sweeteners since the bonds traded actively Wednesday and Thursday after the company unloaded a double whammy of bad news including lower guidance for the fourth quarter and news that the company is now under a formal probe by the Securities and Exchange Commission.

"It was interesting language that leaves room for some investors to be screwed over," a New York-based sellside trader said.

The language used in the company's release indicated that the sweeteners apply to holders of record as of Friday, which doesn't appear to take into account that trades on Wednesday and Thursday probably weren't settled by Friday.

"It means that the people who bought the bonds Thursday or Wednesday have no right to the consent," the trader said, adding that the wording had sent many scrambling to brokers and legal advisers about changing settlement dates.

When Mercury Interactive first announced that it had received a notice of default on its 0% coupon and 4.75% convertibles on Aug. 29, the convertibles traded actively amid uncertainty about what the company, which has enough cash on its balance sheet to cover the issues, would do.

Some speculated Mercury would "pull another Brocade," referring to a loophole Brocade Communications Systems Inc. found in the indenture of its 2% convertibles following a default notice on that issue.

The loophole allowed Brocade, a San Jose, Calif.-based networked storage company, to call the issue, but not for a year until Aug. 22, 2006, and thereby averting a declaration of default.

In the meantime, Brocade deposited $276.1 million in interest-bearing U.S. Treasury securities into an account of the trustee to cover interest, principal and call premium related on the notes until the redemption.

A sellside trader on Friday said Mercury has enough cash to cover the issues and that the company has "decent credit quality," but he called its capital structure "hokey," since it has funds tied up in Europe.

Approval of the proposed waivers for Mercury requires the consent of a majority of the holders of the principal amount of the outstanding securities of each series. The consent solicitations expire on Oct. 18.

Mercury said it has retained MacKenzie Partners Inc. in New York to serve as its tabulation agent for the consent solicitation and directed holders with questions to that firm.

Shares of Mercury Interactive closed up 55 cents, or 1.79%, at $31.31.

Comverse convertibles lower

The convertibles of Comverse Technology were lower after the mobile communications software maker said it plans to acquire CSG Systems International Inc.'s GSS division, software-based billing solutions company, and certain related assets, for about $251 million in cash.

The 0% convertibles of Comverse traded at 142.50 early in the session, when its stock was down, and later rose to 143, compared to a closing share price that was unchanged at $25.29.

The 2.50% convertibles of CSG traded at 101 and were seen at 101 bid, 102 offered, versus a closing stock price of $22.21, up 31 cents, or 1.4%.

GSS is expected to expand Comverse's real-time billing addressable market and enhance its position in the emerging converged billing market, serving wireless, wireline, cable, satellite and internet-based service providers. The acquisition is expected to close by Jan. 31, Comverse said in a news release.

The acquisition was viewed as a "neutral credit event and a good strategic move long term," a New York-based sellside trader said.

GSS customers include Bharti, British Sky Broadcasting, BSNL, BT, China Telecom, eBay, France Telecom, O2, Telecom Italia and certain Vodafone entities.

Weaker outlook reduces Apria

The convertibles of Apria Healthcare initially fell a steeper 0.50 point compared with its underlying shares, which also tanked, after the home health care company reduced its outlook for the third quarter and the rest of the year due to slowing sales and other factors.

The news was viewed as a deterioration of fundamentals and its credit spread widened, a sellside analyst said, regarding the steeper bond move.

The Lake Forest, Calif.-based company said that revenues for the third quarter looked to be less than 1% better year over year due to a slow down in its businesses, including durable medical equipment, respiratory medications and infusion therapy, and linked the shortfall to its discounted contractual arrangements with hospitals.

Reflecting the shortfall of third- and fourth-quarter earnings, Apria now projects 2005 full-year revenue growth in the range of 2% to 3%, instead of 5% to 6% as previously estimated.

The company said in addition to lower revenue, its lower outlook resulted from increases in fuel and health benefit costs, hurricane-related expenses and decreases in the average sales prices for Medicare-reimbursed respiratory drugs.

Apria is scheduled to announce third-quarter results on Oct. 25.

The company has also been looked at as a takeover candidate for some time. In early February when merger and acquisition buzz included Apria, it 3.375% convertibles were quoted at 113.125 with the stock at $32.98.

On Friday, the 3.375s traded at 99.50 versus a stock price of $27. Later it was seen at 99.5 bid, 99.75. Its underlying shares closed down $5.46, or 17.30%, to $26.10.

"Now that the bonds are trading below par there is less risk for convertible arbitrage players, who don't want to short the stock of a company that may suddenly receive a takeover offer that would wipe out the premium on its bonds," the sellside analyst said.

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