Merrill analyst sees concern over short-dated puts easing, except for weak credits

By Ronda Fears

Nashville, July 25 - Comfortable borrowing conditions have helped ease the convertible market's concern about short-dated puts and Merrill Lynch & Co. convertible analyst Tatyana Hube said in a report Friday that the trend should continue through 2004.

However, she said there is still concern about the lower quality credits, as they may find refinancing more difficult.

"Despite past concerns over the volume of convertible puts which became due in 2002 and 2003 and how they were going to be financed, the flexibility of the convertible market and the credit standing of companies has made the rolling over of debt routine for most of these companies," Hube said in the report.

"During the tougher environment of 2002, 'sweeteners' were commonly used to deal with the puts coming due, if affordable. However, as interest rates continued to drop in 2003 and equity markets started rising, more and more issuers chose to refinance their putable issues."

Recently, issuers of many convertibles with short-dated puts, rather than sweeten the existing issue to avoid the put, replaced them with even cheaper convertible deals or straight debt.

"We expect this trend to continue this year and into 2004, as long as interest rates remain relatively flat and there is no significant downward pressure on stock prices," Hube said.

Through the remainder of 2003, there are 20 convertibles with $10 billion in total puts coming due, she said. Some $6 billion of these are candidates for the put exercise, though a continued rebound or a sudden downturn in the equity markets could affect this outlook significantly.

A quick peak at 2004 reveals around $37.7 billion of convertibles with puts, and some 53% are relatively strong candidates at the current stock prices to be put.

"Overall, with regard to repayment of short term puts, concerns primarily lie with issuers of low credit and/or with questionable business and accounting practices, and not tied to any inherent flaws of the put structure," Hube said.

"Based on the experience of the prior two years, most put obligations are far from being a menace, and the success of companies in refinancing their debt in 2002 and in the first half of 2003 bodes well for the future.

"Overall, if there are any potential problems with short-dated puts, they remain company-specific and do not signify a structural flaw in the product itself."

Convertibles that are pretty certain to be put, the report showed, include the Allergan 0% due 2020, Motorola 0% due 2013, Comcast 0% due 2020 and Tyco 0% due 2020. Those issuers, though, already have enough cash and/or credit facilities to meet the put.

The more distressed convertibles fairly certain to be put include the Elan 0% due 2018, American Tower 2.25% due 2009 and Aspect Telecom 0% due 2018, the report showed.

"These issuers still need to come up with additional financing," Hube said in the report.

"For these names, the creditworthiness of an issuer becomes of prime importance to warrant its ability to meet the put obligation. From this standpoint, Elan 0% '18 still causes us the greatest concern."

A put or refinancing also is very likely for the Electronic Data Systems 0% due 2021 and CSX Corp. 0% due 2021, the report said.

Converts where the put is somewhat likely, or precautionary refinancing possible, the report added, are the XL Capital 0% due 2021 and Omnicom 0% due 2032.

These are securities that are currently near or at the money, and relatively small fluctuations in the underlying stock price or credit outlook could sway them into or out of the put zone," Hube said.

"For these issues, precautionary call and refinancing are quite possible."

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