Mercury Interactive gains on waiver consent offer; Vitesse marked lower on delayed filings

By Kenneth Lim

Boston, April 21 - Default-related events at Mercury Interactive Corp. and Vitesse Semiconductor Corp. gave the convertible bond market something to talk about on a slow Friday, marked sources said.

Mercury Interactive's convertibles improved against the stock after the company offered earlier puts on the debt securities in exchange for waivers of defaults stemming from its late annual report filings.

Meanwhile, Vitesse's convertible was marked slightly lower after the company said it had to delay its earnings report amid an investigation into its stock option accounting.

Otherwise, "it was a pretty slow day, actually," said a sellsider.

Other names seen trading included the Bausch and Lomb Inc. floating-rate convertible due 2023, which changed hands about two points lower on an outright basis as the stock slid on news that a Food and Drug Administration safety investigation could take up to a month to resolve. The convertible, which currently has a coupon of 5.311%, was marked at 114.01 bid, 114.51 offered against the closing stock price of $46.68. Bausch and Lomb stock (NYSE: BOL) closed lower by 32 cents or 0.68%.

The FDA and the Centers for Disease Control and Prevention said Friday that investigations into Bausch and Lomb's Greenville, S.C. plant and the company's manufacturing operations could take up to a month to complete. Rochester, N.Y.-based Bausch and Lomb, a maker of eye health products, last week stopped shipping its ReNu with MoistureLoc contact lens solution amid a federal probe into whether the product caused several cases of a fungus infection.

Transocean Inc. added about two points on an outright basis along with a 1.52% increase in the stock on the back of record-high oil prices. The Houston-based contract rig operator's 1.5% convertible debenture due 2021 was marked at 120.79 bid, 121.29 offered against the closing stock price of $87. Transocean stock (NYSE: RIG) closed $1.30 higher on Friday.

"Transocean's stock has been volatile," said a sell-side convertible strategist. "It was kind of in line dollar-neutral, up outright [on Friday]."

Transocean stock got a boost Friday from oil prices, which reached record highs on Friday, market sources said. The price of a barrel of light, sweet crude due for June delivery reached an all-time high of $75.35 in New York before settling at $75.17 on Friday.

Gilead Sciences Inc.'s newest convertibles continued to languish below par after they were panned for being talked too aggressively earlier in the week. The Gilead 0.5% convertible due 2011 was marked at 99.25 bid, 99.5 offered against a stock price of $65.13 on Friday, while the 0.625% convertible due 2013 was 99.375 bid, 99.625 offered at the same stock level. Gilead stock (Nasdaq: GILD) slid 0.98% or 64 cents to end at $64.52.

Gilead is a Foster City, Calif.-based biopharmaceutical company.

Mercury gains on waiver offer

Mercury Interactive's convertibles were firmer on Friday after the company offered earlier puts on those debt securities in exchange for waivers of defaults related to its late annual report filings.

The company's zero-coupon convertible due 2008 was marked at 102.5 against the closing stock price of $37, while the 4.75% convertible due 2007 was marked at 99.75 at the same stock level. Mercury Interactive stock finished slightly higher by 13 cents or 0.35%.

Mercury Interactive on Friday asked holders of both convertibles to waive any events of default relating to its late annual report filings. In exchange, the Mountain View, Calif.-based enterprise software company is offering a put option on March 1, 2007, for the 2007 paper and a put option on Oct. 31, 2006, for the 2008 paper. Both puts are at a premium.

Convertible holders have until May 5 to give their waivers but Mercury Interactive said it has already secured written agreements from holders of a majority of both convertibles to give their consent.

"Mercury Interactive was bid up on the news," said a sellsider. "The company has plenty of cash, they already have a majority consenting to it, it would be stupid not to do it if you have the convertible."

A Connecticut-based convertible analyst was also confident that Mercury Interactive would achieve its objective.

"It's pretty much a done deal as far as I'm concerned," the analyst said. "Holders of a majority of the bonds have already consented, and from what I could tell they were pretty close to pricing in the additional procedures."

The analyst said there is little change in Mercury's credit health. "For one thing, if the bonds are accelerated, then there won't be any status as credit because investors are going to get their money back," the analyst explained.

And Mercury should not have difficulty meeting its debt obligations. The company, which said in March that it could be in an event of default because it could not file its results for the second and third quarters of 2005 on time, has reported that it had more than $1.2 billion in cash as at the end of February.

"The question is more really when holders get paid than if," the analyst said.

Vitesse up on default hopes

Vitesse Semiconductor's 1.5% convertible due 2024 was marked lower on an outright basis on Friday as the stock dived after the company said it would not be able to file its results for the quarter ended March 31, 2006 by the May 10 deadline.

The convertible was marked at 88.78 bid, 89.78 offered at the closing price of $2.51 by a major convertible trading desk, while Vitesse stock (Nasdaq: VTSS) dropped 7.04% or 19 cents on Friday.

Vitesse said late Thursday that it would not be able to report its quarterly earnings by May 10 amid ongoing investigations into the timing and accounting of certain stock option grants. It also said that its chief executive, chief financial officer and executive vice president were on administrative leave over their involvement in issues related to the "integrity" of stock option documents. The company first reported on the investigation on Wednesday

"If you had thought a little about what they said [earlier in the week], you would have fully expected that they were going to say what they said today," said a sell-side convertible analyst.

The analyst said the announced delay could be the first of many.

"Just look at the history of some of the companies that have had accounting issues over stock options," the analyst said. "Mercury, it took them quite a few months to get their financials current, and they're still not current. MSC Software, they just finally filed their 10-K for 2004, and we're still waiting."

Options accounting errors usually do not involve a lot of money or have a significant effect on past results because there is no cash impact, but they take a lot of time and management involvement to resolve, the analyst said. The bigger concern is that the investigations reveal more serious problems.

"Take an analogy to MSC Software. What started out as what they thought was a fairly isolated problem with options turned out into quite a larger accounting problem, and they restated a lot of numbers," the analyst said. "It doesn't really change things that much, but it could turn into a Pandora's box."

The analyst said some convertible holders may start applying pressure on the company around July to accelerate the convertible debt, but investors may want to exercise caution if they are hoping for the company to readily accede or offer sweeteners.

"What may make it more difficult in Vitesse's case for holders, their indenture reads very similarly to BearingPoint, where the language of the indentures ... it doesn't really require them to file anything with the SEC on any particular timetable," the analyst said. "That really takes all the teeth out of the indenture."

Vitesse will likely dismiss any claims of default, the analyst said. But even if Vitesse had to redeem the convertibles, the company currently does not have the resources to meet its debt obligations without seeking further financing.

"They would have to refinance in some way," the analyst said. "Vitesse doesn't have a lot of cash, they're EBITDA negative, cashflow negative, and not very much cash on the balance sheet either. It may look for some sort of alternative solution, which sometimes can lead to an acceleration. Sometimes there can be incentives extracted form the issue, additional features built into the converts, a fee in exchange for a waiver."

Vitesse is a Camarillo, Calif.-based maker of integrated circuits for the communications and storage industries.

© 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.