Computer Associates accounting ills resurface; CompuCredit seen; Impax Labs holders hope for fee

By Ronda Fears

Nashville, May 27 - Convertible players pretty much shut down around noontime Friday, heading out early for a long three-day Memorial Day weekend. As in other markets, volume was very light, and overall little changed outside of a big move downward in Computer Associates International Inc. on new accounting problems uncovered at the software giant.

Ford Motor Co. and General Motors Corp. convertibles continued to gain steam going into the holiday weekend that typically is thought of as the unofficial start of summer and the vacation driving season. Ford's 6.5 convertible preferred was still out front in gains this week, despite its bailout of former unit Visteon Corp., with the issue up another half-point to 40.75 while the stock edge up $0.04, or 0.40%, to close at $10.07.

Crude oil futures continued to climb, as well, settling at $51.85 a barrel, up 84 cents, on the New York Mercantile Exchange, which closed before news broke that Saudi Arabia had declared a state of alert on its King Fahd's hospitalization with a serious illness.

Even with a thin market Friday, traders said the market was still feeling better on whole. "We're seeing fewer and fewer of the big block sales, which puts us more at ease," as one sellsider put it.

With the heaviest of hedge fund redemptions not yet reported - for second quarter - many market observers say the absolute bottom may have passed as they feel most of the sell-offs have taken place.

Recovery may continue

But many onlookers, including primary market sources, say full recovery in the convertible market may extend well into the summer.

"While the recent snap back has come as a welcome relief after a prolonged downtrend, we expect the uncertainty in the market to continue for the next few months driven by redemption and credit risk re-pricing concerns," said Venu Krishna, head of U.S. convertible research at Lehman Brothers, in a report Friday. "In particular, hedge fund redemptions continue to be a source of uncertainty. We expect things to become clearer in the July-August time frame."

To be sure, the state of the hedge fund industry is as clear as mud, if returns are any judge of the matter.

Man Group, the world's largest publicly traded hedge fund manager, reported earlier this week that its pretax profit for the fiscal year ended March 31 climbed 9.6% to $784 million, with funds under management rising 11.7% to $43 billion. Contrary to heavy redemptions seen in the United States, Man Group said redemptions, which it allows once a month, have been at historically low levels.

At the other end of the spectrum, though, it was reported earlier this week that London-based convertible bond hedge fund GLG Partners - a big convertible seller in U.S. markets in recent weeks, remember - lost 6.7% in May, compounding its losses that amounted to more than 10% from mid-March to the end of April, according to Bloomberg data.

Computer Associates off 7 points

Computer Associates' financial report after the close was disappointing on a couple of levels, the most severe being that new accounting troubles have surfaced at the company. Having climbed back from previous accounting disasters with a new management team and settlements with regulators, the news sent Computer Associates' convertibles tumbling by around 7 points Friday.

The 1.625% convertible fell to 141 bid, 141.5 offered, versus ending Thursday basically unchanged at 148. The underlying stock plunged $1.36, or 4.75%, to $27.30 amid a heavy sell-off.

Standard & Poor's cut the company's credit rating (BBB-) outlook to negative from stable, noting it "had assumed that Computer Associates' accounting issues were behind it."

Computer Associates said it has identified apparent improper accounting practices related to transactions that occurred between fiscal 1998 and 2001 and, as a result, it will make further financial restatements for fiscal 2000 through 2004. In addition, its fiscal 2005 filing at the SEC will be delayed in order to complete its review, which has been a continuing part of its revenue recognition examination as required under a deferred prosecution agreement with the Department of Justice and a consent judgment with the SEC.

The company said it expects the impact of the restatements to be minor and said it has determined that former members of senior management, who are no longer employed at the company, were involved in approving the transactions in question.

Straight bonds considered cheap

Yet, even with the news, some credit analysts consider Computer Associates bonds cheap, particularly its straight 5.625% issue due 2014.

Solid results were clouded by new revelations of transactions that were accounted for improperly, said CreditSights analysts in a report Friday.

"While it is never comforting to see improper accounting procedures, we are encouraged that new management is trying to clean up the remains of the accounting improprieties. Furthermore, the adjustments which need to be made are relatively small and none of the adjustments will have an impact on the company's current or future cash flows," the CreditSights analysts said.

"We still believe that the [5.625%] bonds are cheap and believe that as the company implements its new priorities and strategies during fiscal year 2006, we should see a financially and strategically stronger CA."

The Computer Associates' straight bonds, the 5.625% due 2014, the analysts noted, have widened from a spread to Treasuries of 140 basis points over at the beginning of the year to 195 bps recently. A convertible desk analyst on the sellside did a quick thumbnail look at the convertible, at 141 versus the stock at $27.30, and said that a 25% volatility assumption would put the implied spread at 415 bps over Treasuries.

CompuCredit gets second look

Cheapness, or the perception thereof, was a formidable barrier to the new deal from CompuCredit Corp. earlier this week, but on second glance there were some convertible players poking around with a more positive view at sub-par levels.

The $250 million overnighter was printed Tuesday with a 3.625% coupon and 30% initial conversion premium - at the wide end of guidance for a 3.125% to 3.625% coupon and 30% to 35% initial conversion premium - but joint bookrunners Banc of America Securities and JPMorgan Securities reoffered it at 97. Buyers stilled balked, and the deal sank out of the chute to 93.5 bid.

It has ticked up a couple of points since then, and a sellside trader pegged it a half-point better Friday at 95.5 bid, 96.5 offered. CompuCredit shares closed Friday up 32 cents, or 1.03%, at $31.53.

"At first the thought of them taking on more debt was a bit unnerving, but at second glance, it appears to be worth it," he said when asked what his clients were saying about the bonds. "It is positive that they sold convertible notes rather than issuing new shares. Also, it is very positive that they intend on using the net proceeds to finance acquisitions and for capital uses."

Headwaters makes headway

Headwaters Inc.'s convertible has been active all week, a sellside market source said, and moving higher. On Friday buyers perhaps felt vindicated in their choice by the company's announcement that it had repaid $50 million of bank debt early.

The Headwaters 2.875% convertible due 2016 was quoted up 0.375 point to 122.375 bid, 123.125 offered with the stock at $32.15. Headwaters shares closed at $32.50, up 14 cents on the day, or 0.43%.

Headwaters, a Utah-based clean coal technology and construction materials concern, said it has repaid $50 million of its senior secured second-lien debt, reducing future interest expense by as much as $4.2 million a year and lowering the second-lien debt balance to $50 million. The company paid a 3% premium in connection with the early repayment and will immediately expense about $1.3 million of debt acquisition costs as a result.

Since Sept. 30, Headwaters said it has repaid about $300 million of debt, resulting in an expected debt balance of $675 million.

Impax may try to avoid default

Some buyers for Impax Labs Inc.'s convertible are thinking that within the next three weeks they may be in store for a "cash kiss" or some other sweetener from the company as an incentive not to force the bonds into default because of the company's delay in filing its quarterly report at the SEC.

Impax Labs, along with a slew of other companies, has sought an extension to file its financial reports because of more stringent accounting review standards. But in its convertible indenture this could give bondholders cause to force a default claim.

"It seems like June 21 is coming up fast. You can put your bonds to them at par if they don't file and get that 'e' off the stock [ticker IPXLE, which was changed from IPXL on the filing miss] by the 21st," a sellside trader said. "These bonds are moving up."

On Friday, the Impax Labs 1.25% convertible due 2024 was quoted up a half-point at 87.5, and the sellside trader said that is up from below 80 several sessions ago.

"They [Impax Labs] have been rumored to be talking to bondholders," said another sellside trader. "It's more likely they end up like Interpublic [Interpublic Group of Cos. Inc.] and have to pay off bondholders not to force the bonds into default."

The company has until June 21 to get waivers or file its financials.

Impax and Interpublic are among at least 77 companies with market capitalizations of more than $100 million that have notified the SEC they would need more time to file quarterly reports - more than double the 36 companies of that size with delays in first quarter 2004, according to a report by Glass Lewis & Co., a San Francisco research firm.

© 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.