Quanta reoffers $125 million deal half a point below talk at 97.75; Skechers sees interest as maturity nears

By Kenneth Lim

Boston, April 28 - The convertible market had a quiet session on Friday, with investors distracted by a wide spectrum of news and the coming weekend.

Skechers USA Inc. slid slightly in line with the stock, but observers said the convertible has emerged as a potentially profitable play with a maturity approaching in 2007.

Quanta Services Inc.'s new 3.75% convertible due 2026 was seen marked below its reoffered price at 97 after the security was sold cheaper than initially talked.

In general, the convertible market was slow on Friday, market sources said. On the macroeconomic front, investors were worried about Iran's continued failure to cooperate with United Nations nuclear inspectors and the higher oil and gold prices. On the earnings side, Microsoft Corp.'s lowered forecast sent its stock reeling more than 11% and cast a shadow on the rest of the market, said a sell-side convertible bond trader who also noted that summer seems to come earlier every year.

"There's not a lot trading today," the trader said. "It's extremely quiet. You got security concerns, gold up 20, all kinds of stuff going on. Microsoft. Guys are just reeling in their buying."

Also seen trading on Friday was Openwave Systems Inc.'s 2.75% convertible due 2008, which fell about seven points on an outright basis while its stock tumbled by almost a tenth as analysts gave mixed reactions to its third-quarter results.

The Openwave convertible was seen at 120 bid, 120.5 offered against a stock price of $18.94 on Friday. Openwave stock (Nasdaq: OPWV) closed at $18.61, down by 9.26% or $1.90.

Openwave reported late Thursday that it had earnings of $9.6 million, or 10 cents per share, in its third fiscal quarter, from a loss of $2.6 million, or 4 cents per share, in the year-ago period. The Redwood City, Calif.-based developer of mobile software for telecommunications service providers also saw growing business with Motorola and Cingular Wireless.

"There's some confusion over whether the results were really that good," said a sellsider.

Analysts were split over the strength of Openwave's earnings. RBC Capital Markets' Mike Abramsky cut the stock to underperform from sector perform, saying that the company could disappoint investors as its organic growth lags the industry. But Jefferies & Co.'s Katherine Egbert maintained her buy recommendation on the stock, citing strong deal momentum with recent wins at Cingular, Motorola and O2.

Quanta reoffers deal below talk

Quanta Services' new 3.75% convertibles due 2026 were reoffered to investors at 97.75 on Thursday, half a point below earlier talk for a reoffer price of 98.25. The convertibles were seen at around 97, while Quanta stock (NYSE: PWR) gained 0.25% or 4 cents to close at $16.22.

The $125 million deal, which has a greenshoe option of a further $18.75 million, was supposed to have been priced overnight on Thursday morning, but syndicate sources said on Thursday pricing would only be set later in the day.

Credit Suisse, Bank of America Securities and JP Morgan Securities were the bookrunners of the Rule 144A deal.

Houston-based Quanta Services said it will use the deal proceeds, together with existing cash, to tender for its $172.5 million of 4% convertible subordinated notes due 2007. The 4% convertible was marked at 98 offered, 99 bid against the closing stock price on Friday.

Quanta Services provides specialty network contracting services to the electric power, gas, telecommunications and cable television industries.

Market observers said they were not surprised that the deal had to be repriced, describing the terms as "aggressive."

"At 97.75, it must have been right around fair value, but the story is a little complicated," said a sell-side convertible analyst. "It's [the company] done very well the last two quarters, the credit, but before that it doesn't really have a track record. I think this name is not that straightforward."

The analyst said that the convertible models fair at a credit spread of 300 basis points over Libor and a volatility of 30%.

"It comes around to fair value, so it doesn't look all that great," the analyst said. "But if the stock is good I'm sure people are buying it."

A buy-side convertible analyst whose firm took a long position on the convertible said the equity's strong prospects are enough to overcome the aggressive pricing of the convertible.

"The convert, how it was executed was not perfectly done in that the structure was a bit funny, and it was brought overnight, but sometimes you have to overlook the imperfections," the buysider said.

The buysider agreed that the deal could have been cheaper, but said Quanta Services was a solid company, and "the stock will probably go higher based on the fact that the end-market is seeing a nice pick-up."

The buysider's firm also owned the older convertibles - "we've done very well on it," the analyst said - and sees the new deal as offering features like takeover and dividend adjustments not attached to the old notes.

"I'd rather have the downside protection," the buysider said, adding that the company was exchanging one debt for another and so the impact on its credit quality was not significant.

Hedged investors would naturally be more picky about the terms of the convertible, but outright investors may be "penny wise pound foolish" if they stayed out, the buysider said. The analyst cited Wesco International Inc.'s 2.625% convertible due 2025, which was offered in 2005 and now trades around 190, as an example of how a strong equity story could justify getting into a convertible even if the initial terms were not terrific.

"If you gripe a little about whether it should be 99 or 98 [at pricing], you stand to lose out on the 190," the buysider said. "That's kind of the way I looked at it."

Quanta Services will report its first-quarter results on Thursday, May 4, and has said it expects to meet or exceed the upper end of its earlier guidance.

Skechers in spotlight as maturity nears

Skechers' 4.5% convertible due 2007 has gained about two points on an outright basis over the past week as investors continue to play the security even during its call period.

"There's call risk, but it's close enough to par that people are willing to play it," said a convertible bond trader.

The convertibles were seen marked at 106 against a stock price of $27.50. Skechers stock (NYSE: SKX) closed at $27.35, down by 51 cents or 1.83%, on Friday, retracing some of the gains made on Thursday after the footwear maker reported a 61% jump in quarterly profit.

The trader said the convertibles were "kind of attractive to look at" with investors hoping to take positions ahead of expectations that the company may seek to refinance its debt, although the company has not mentioned any plans.

A sell-side analyst said the convertible has a relatively high coupon, but the outstanding principal is small, and that could limit interest in the convertible. The debt will probably get refinanced "at some point, but whether the company will call it, I don't know," the analyst said.

In the meantime, however, the convertible was "definitely interesting," the analyst noted.

"It's definitely an attractive situation, actually," the analyst said. "Because it's a short maturity, the worst you could do is get par. The gamma's pretty high on this bond, if you set it up and the stock cracks, it'll be pretty good for you."

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