Barclays analysts see upside opportunity in Infineon 5% euro converts on volatility spike

By Ronda Fears

Nashville, Jan. 11 - Infineon Technologies AG's announcement that it has terminated the agreement to sell its fiber optic assets to Finisar Corp. could create some upside in Infineon's 5% euro convertible due 2010, according to analysts at Barclays Capital Markets.

Infineon's euro convertibles were easier on the news.

Barclays convertible analysts Luke Olsen and Haidje Rustau said in a bulletin that the development overall was negative for Infineon credit but they anticipated some upside potential in its 5% convertible due 2010 as a result of a spike in volatility on the news. They were cautious on the 4.25% euro convertibles due 2007, however.

"Overall, we see this event as negative for the credit but potentially positive for volatility, at least in the short to medium term," the Barclays convertible analysts said.

"While we are cautious on the busted Infineon 4.25% 2007, we think that Infineon 5% 2010 [with a 38.6% delta and 47.4% market premium] could potentially gain on a delta-hedged basis, assuming that the increase in value from a higher implied volatility would outweigh the loss from a wider credit spread as the bond has an upsilon of around 15 bps."

In April 2004, Infineon had agreed to sell its "loss-making" fiber optic business to Finisar, but said on Tuesday it was withdrawing from the transaction following trouble in the negotiations. Under the latest amended terms of the sale, on Oct. 11 Finisar was to have issued 110 million shares of common stock to Infineon, valued at $206 million at stock levels on Monday.

"The significant delay and high uncertainty of closing are expected to result in deterioration of our Fiber Optics business and in potential harm to our customers," Infineon said in a prepared statement. As a result, the discussions were terminated.

In parallel, Infineon said it would begin the necessary restructuring of its fiber optics business, in addition to assessing its legal options to recover damages related to the proposed asset sale with Finisar by way of an arbitration proceeding in Germany.

Analysts expect the fiber optics restructuring program to result in major job cuts and expenses.

Although the division only accounted for 6% of company revenues in 2004, it has been a major drain on Infineon's profitability for the past four years. Consequently, being left saddled with it and the challenge of turning it around is a downbeat turn of events for Infineon.

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