Lear surges on rumored refinancing; Apex Silver slides on probe; Watson falls on takeover

By Kenneth Lim

Boston, March 13 - Negative news at a few companies got the convertible market off to a bumpy start on Monday. Auto parts maker Lear Corp. saw its convertible gain on rumors of a possible debt refinancing as the company faces an approaching put date and operating losses.

Apex Silver Mines Ltd.'s convertible bonds also fell after the company said a Latin American unit may have made improper payments to government officials and run afoul of U.S. laws.

Meanwhile, Watson Pharmaceuticals Inc. retreated after its plan to buy Andrx Corp. was met with analysts' downgrades.

Across the Atlantic, Hungary's national oil-and-gas corporation MOL downsized and sweetened the terms of its offer of perpetual exchangeable bonds.

Lear rises on financing talk

Lear Corp.'s zero-coupon convertible due 2022 got a boost yesterday from unconfirmed rumors that the auto parts maker may be looking to raise funds to meet $700 million of debt obligation due in 2007.

Included in those obligations are about $300 million from its convertibles, which have a put in February 2007. The convertibles gained about one point on Monday, trading at about 45.40 when the stock closed at $16.01. At that closing price, Lear stock (NYSE: LEA) was down sharply by 10.36%, or $1.85.

"I am thinking, exchange offer coming to deal with this before February 2007 put," said a sell-side trading source.

Lear representatives could not be reached for comment.

Prudential Equity analyst Michael Bruynesteyn noted in a research report that Southfield, Mich.-based Lear has a $400 million term loan and a $300 million convertible-bond issue that will become due in February 2007, and he believes that company will announce its plans to address those obligations in the coming weeks.

Another analyst pointed out that Lear has "some serious liquidity issues" because union discussions with the United Auto Workers taking place shortly after the debt becomes due will also put pressure on the company to address its leverage levels.

"They do need to do some serious financing," the analyst said.

And because Lear does not have enough on its balance sheets to meet all its obligations if all the holders of the convertible bond exercise their put option, bondholders may be betting that the company will "offer...sweeteners to not put the bond" in a new issue.

"That would be positive in the convert in the short term," he added.

Another sell-side analyst said the prospect of dilution from a new convertible bonds issue explained why the stock fell so sharply on Monday, but stressed that he had not seen any indications that suggests a convertible issue was more likely to be used than other options before the company.

Nevertheless, he agreed that the company will have to do something because "they clearly don't have the cash to pay the put." He said investors decide on whether to exercise their put option based partly on how well they think the stock is going to perform shortly after the put date.

"To make the theoretical value equal to the put price on February 2007, what does the stock have to be after the put date?" he explained. "So assuming a certain vol and the credit assumption, you do the math and you kind of lay it back into the stock price. It would seem that there's a high degree of likelihood that unless the stock rises significantly, that investors would exercise the put, given the current situation."

In fact, "it would seem highly likely that unless the stock gets back to the low $60s, this thing is for sure going to get put," he said. Prudential analyst Bruynesteyn had a target of $20 for the stock.

At current price levels around 45 points, the convertibles are trading at about a 9.75% yield to put, compared to about 11% a few days ago, the analyst said.

Lear stock had already fallen on Friday last week after the company disclosed in its annual report that it had received a subpoena from the Securities and Exchange Commission related to ongoing investigations into the way General Motors Corp. accounts for supplier payment and credit. Lear said the SEC had sought information from 2001 to the present.

But Bruynesteyn did not think the SEC probe was significant for Lear because the company itself is not under investigation.

Apex Silver unit under spotlight

Apex Silver's pair of convertible bonds fell slightly in line with the stock on Monday as investors reacted to the company's disclosure on Friday that an internal probe showed that a Latin American subsidiary may have made improper payments to government officials.

The mining company's 2.875% convertible due 2024 traded at about 94 points versus a stock price of $23, while the 4% convertibles also due 2024 changed hands at about 106 versus $23.

Apex Silver stock (AMEX: SIL) opened about $1.50 lower on Monday at $21.95, but climbed back later to finish at $23.24, 16 cents or 0.68% below the previous close.

George Town, Cayman Islands-based Apex Silver said the alleged payments were made "several years ago in connection with an inactive, early stage exploration property that is not related to any of Apex Silver's active exploration or development properties." Apex Silver mainly seeks mining projects in South America and Mexico.

The company also informed the Department of Justice and the Securities and Exchange Commission of the investigation, and has been told that those authorities may begin their own investigations into the matter, including possible violations of the Foreign Corrupt Practice Act.

Apex Silver said it will cooperate fully with any investigations.

Due to the internal investigation, Apex Silver also expects to delay the publication of its annual report while it reviews management's assessments of internal controls in 2004 and 2005.

A buy-side convertible analyst brushed the news off as "not significantly negative" on its face, but said similar events could continue to put pressure on the value of the company's securities.

"They're working in Bolivia, so it's probably not a very unusual situation when they have to work with government officials, and they're probably working all the time on the fringe between legal and illegal, proper and improper," the analyst said. "Of course, you don't want to see them violate any laws, especially if the fines can be quite big.

"But since the company brought this out itself, it may not be very serious, unless the DOJ discovers something else," the analyst said.

The company may have to spend some money to tighten its internal controls, but that is likely to be an insignificant sum for the cash-rich company, he said.

The delay in the annual report is unlikely to trigger any default events, he added. "It may violate some covenants, but if I were a lender, I wouldn't force a default," he said. "They're less than a year away from beginning production."

Despite the probe's small impact, the analyst said investors may have to be prepared for the occasional negative news from the company in the future.

"The shares are trading at a significant discount to other mining names, but I think it's justified given where they're producing, building their mines in Bolivia," he said.

"Given the recent elections [in Bolivia], there's too much uncertainty over what the government might do," he explained. "They've nationalized oil, and although the chances of silver being nationalized are low, the chances of disruptions or the cost of doing business is very high."

"You're going to see this news flow from time to time," he added.

Watson acquisition received poorly

Watson Pharmaceuticals' 1.75% convertible due 2023 was seen at 91 points against a stock price of $28.50 on Monday, down slightly in line with the stock after the generic drug maker said it was buying Andrx Corp. for $1.9 billion.

Corona, Calif.-based Watson Pharmaceuticals said Monday the move would create the country's third largest generic drug maker based on prescriptions dispensed. Watson plans to pay $25 per share for Andrx, a 32% premium to Andrx's 30-day average stock price. The deal, which is expected to close in six months, still needs shareholder approval. Plantation, Fla.-based Andrx also makes generic drugs.

CIBC World Markets Corp. is advising Watson Pharmaceuticals on the deal, while Banc of America Securities is advising Andrx.

The deal sent Watson Pharmaceuticals stock tumbling on Monday, falling 84 cents or 2.84% over the day to close at $28.71.

Analysts did not seem excited about the acquisition for Watson Pharmaceuticals. Credit Suisse equity analyst Ken Kulju downgraded Watson Pharmaceuticals to neutral from outperform in a research note, citing integration risks.

"Andrx is still struggling with FDA [Food and Drug Administration] manufacturing and re-certification issues, essentially preventing the approval of any new products by the agency since late 2004," the analyst said. "Andrx relative profitability characteristics are also relatively low, with a gross margin of about 19.5% in its distribution segment, and base generic business at about 33%, tracking below Watson's gross margin levels."

Standard and Poor's also put Watson Pharmaceuticals' BBB- corporate credit and senior unsecured debt ratings on credit watch with negative implications.

Hungary's MOL shrinks, sweetens deal

MOL on Monday priced a downsized €610 million of perpetual exchangeable bonds to yield 4% for the first 10 years with an initial conversion premium of 30%.

MOL, which is offering the notes through Jersey-incorporated finance company Magnolia Finance Ltd., originally planned to offer between €660 million and €720 million of exchangeables with talk guiding for a coupon between 3.5% and 4% and an initial conversion premium between 35% and 45%.

Pricing was finalized Monday, market sources confirmed.

Morgan Stanley and Co. International is managing the deal, which will be distributed under Regulation S.

MOL, also known as the Hungarian Oil and Gas Company plc, also improved the coupon's step-up after 10 years to three-month Euribor plus 550 basis points from three-month Euribor plus 375 bps guided for during talk.

Dividends paid by MOL will be also passed to bondholders in cash instead of an originally planned ratio adjustment. And a takeover protection that steps up the coupon to three-month Euribor plus 800 bps if there is no redemption will now include recommended change of control situations paid in cash, and not just unsolicited takeovers.

Budapest-based MOL, the national oil and gas company of Hungary, said in a presentation that the deal will allow it to monetize its treasury shares while keeping within its target leverage ratio and give it more flexibility to seek strategic opportunities.

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