Deutsche analysts say likelihood fading put will be exercised on Tyco 2020 converts

Nashville, Tenn., Oct. 30 - Deutsche Banc Alex. Brown convertible analysts say that since Tyco's stock has remained around $50 and the conglomerate's convertibles have richened, it is becoming less likely that the upcoming Nov. 17 put on the Tyco zero-coupon convertible due 2020 will be exercised. If the converts are not put back to the company, an estimated $3.5 billion event, then the analysts said the Tyco zero-coupon convertible due 2021 should richen as well.

"The question as to whether or not the bond will be put remains a focal point for the convertible and credit derivatives markets. In our 15 October report, we wrote that the inflection point above which bondholders were unlikely to put their bonds was US$51.50 per share of TYC common stock. At this price we felt that the theoretical value of the bond after the put date would remain above the 75.282 put value even as the put fell away," said the Deutsche Banc analysts in a research report.

"However, as Tyco stock has remained around the $50.00 level, the bond has richened as investors have focused on the possibility of it remaining outstanding after the put date. This richening has resulted in the inflection point falling to $49.00 currently, based on an implied volatility of 28.6%.

"As this is now below the current share price, we believe there is a good chance that the bond will not be put by the last day of putability, Nov. 9."

The implications for the second Tyco zero-coupon convertible due 2021 are very significant. If the first bond is not put, the possibility of a third Tyco bond to finance the put value of the first diminishes and the second bond should richen significantly, which the analysts said there is evidence that this is happening already. Had the put been more likely to be exercised, the second Tyco zero-coupon convertible was expected to weaken, because Tyco was more likely to pay the put in cash rather than stock. And, if the company had to fund a cash outlay, the possibility of a third Tyco convertible would further weaken the second issue.

Tyco's convert will be the market's first experience with the impact of the multi-put phenomena that has become the rage with zero-coupon convertible deals over the past couple of years.

At 2 p.m. ET, with Tyco common shares at $48.65, the Tyco coupon convertible due 2020 (Baa1/A), which was issued at 74.17 in November 2000, was flat Tuesday at 75.5 bid, 75.75 offered and the 0% due 2021, which was issued at 74.17 in February, was off 0.25 point to 73.75 bid, 74 offered. Tyco common shares closed down $1.02 at $48.58.

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