Lear gains on financing news, Amdocs strengthens; new issue from AMG fails to enthuse

By Rebecca Melvin

Princeton, N.J., March 29 - The convertibles market was dominated early Wednesday by the Lear Corp. story, which caused a "huge push" of trading to the benefit of outright players, traders said. Other auto paper was also in the cross hairs on Wednesday, but trading was not particularly noteworthy, sources said.

The flurry of Lear trades, spurred by news that the auto parts maker has commitments for $800 million in loans and suspended its dividend, slowed significantly by 1 p.m. ET, which is about when news hit the tape that S&P's had cut Lear three to five notches deeper into junk territory.

By that stage of the session, about 200 million Lear 0% convertibles had traded, according to a sellside source.

"Lear had a good day," a New York-based hedge fund trader said. "People were thinking they might do another convert. But they aren't...yet."

A focus of the session later in the day was Amdocs Ltd., a St. Louis-based billing and customer relationship management software company.

"There was a large seller of DOX, with 70 million to 80 million [shares] traded right around 3 p.m.," a sellside trader said. A buysider confirmed heavy volume on "both sides," with the bonds up by about half a point or so.

"There was no weird pricing or anything. The bonds were a little better," the New York based buysider said.

Extending gains was Level 3 Communications Inc., which saw its convertibles and stock gain sharply Tuesday after the company raised its first-quarter guidance. In particular, the Level 3 5.25% convertibles due 2011 were "a rocket ship," gaining another 10 points or more on Wednesday.

The debt heavy, C-credit company, based in Broomfield, Colo., said Tuesday it was raising its first-quarter and full-year estimate for operating income before depreciation and amortization due to stronger than expected results from its higher-margin core communications services business as well as progress in integrating WilTel Communications, an internet services company that Level 3 acquired.

Meanwhile a new issue from Affiliated Managers Group Inc. made a lackluster debut. The $291 million convertible preferred bonds were re-offered at $49.50, or 99 in bond terms. It rose in trade to close at 50.25 bid. 50.50 offered, according to a syndicate source. But on a dollar neutral basis, the bonds lost about 0.125 point in trade on Wednesday.

The energy sector on Wednesday was a lot slower than it had been on Tuesday. "It wasn't a hot topic," a New York-based sellsider said.

But outright interest was seen in generic drug names, according to another New York-based sellsider. "In the last few days, outright buyers have been initiating and adding to their positions in generic names," he said, mentioning Watson Pharmaceuticals Inc. and Par Pharmaceuticals Cos. Inc. as among those gaining attention.

"Watson is one of the cheaper issues out there," he said, adding that most things have richened up in the last month or so.

"Watson shares are at a 52-week low, and it is in the process of acquiring ADRX [Andrx Corp]. "Some people like that, and some people are seeing the downside," he said.

March returns seen "decent"

Things have richened up, he said. "I was talking to a client last night and he said, 'Show me anything 3% cheap and I'll buy it.'"

But heading into the end of the week, which also represents the end of the month, players were beginning to assess market returns. Generally for March, returns were characterized as better than February, but not as good as January.

"We're three months into the year, and overall I think it was a decent first quarter. I think there were some double digit returns, but more likely mid-single digits, which is pretty good. I think clients are relatively happy," a sellsider said.

What is needed is more new issuance, sources agreed. One complained there were too many little deals and another said there were only a few large deals and not enough smaller ones, but both agreed the market isn't seeing the level of new issuance that everybody was expecting.

Lear 0s gain 1.5 points

The 0% convertibles of Lear traded up to 46.25 bid, 46.75 offered after the Southfield, Mich.-based company announced it received commitments from four of its largest lenders to provide Lear with an aggregate $800 million of secured term loans.

A portion of the proceeds will be used to refinance the company's $400 million term loan scheduled to mature in February 2007. The remaining proceeds are expected to fund the retirement of Lear's 0% convertible senior notes and for general corporate purposes.

The financing commitments are subject to customary terms and conditions. JPMorgan Chase Bank, NA, Bank of America, NA, Citibank, NA and Deutsche Bank are the four major lenders.

In connection with the new term loan facilities, the company's primary credit facility would be amended and restated to, among other things, provide additional collateral for both the company's existing revolving credit facility and the new term loans, increase the interest rates on the revolving credit facility and provide additional flexibility under the facility's existing financial covenants through 2007.

Lear's board also suspended the company's quarterly cash dividend program to provide an additional measure of liquidity cushion given current industry conditions.

The company said that it was focused on preserving the company's financial flexibility in a challenging industry environment.

S&P said it assigned a B-2 short-term corporate credit rating to Lear, lowered its corporate credit rating to B+ from BB+ and senior unsecured debt rating to B- from BB+ and removed both BB+ ratings from CreditWatch with negative implications, where they were placed Jan. 25.

The ratings assume that the company will successfully raise at least $800 million in new secured debt to refinance upcoming maturities. But the outlook is negative, with the downgrade reflecting a sharp deterioration in Learšs operating performance during 2005 and the expectation that earnings and cash flow generation will remain below previously expected levels for the next few years, the agency said.

The downgrade of the senior unsecured debt is also due to structural subordination concerns and because there has been an increase in the amount of the company's higher-ranking secured liabilities.

Lear has total debt of about $3 billion and debt to EBITDA of 4.8x, S&P said. Lear reported pretax income of $103 million for 2005, which was sharply lower from its solid earnings in prior years. The weakened financial performance stemmed from reduced automotive production in North America, volatile production schedules, unfavorable shifts in product mix, unusually high new-product launch costs and higher raw-material costs.

The Lear 0% convertibles due 2022 traded at 46.625, compared to 45.25 bid, 45.5 offered on Friday. Lear shares (NYSE: LEA) closed up $1.54, or 9.1%, at $18.49. Shares were lower by 2.65% in after-hours trade

AMG preferreds lose about 0.125 point

The new preferred convertibles of AMG were slightly higher on an outright basis, at 50.25 bid, 50.50 offered at the close, according to a syndicate source. But on a dollar neutral basis, with the shares (NYSE: AMG) up $3.94, or 3.9%, at $105.39, the new convertibles were lower by about 0.125 point.

The bonds were priced through subsidiary AMG Capital Trust I, but they are guaranteed by AMG Inc., a fund manager.

The company priced $291 million of 30-year preferreds at par of $50 to yield 5.1%, with an initial conversion premium of 47.86%, according to syndicate sources. But the convertibles were re-offered at 49.50.

The overnight deal was also downsized slightly from an expected $300 million due to covenant requirements under the deal's trust structure.

Bookrunners for the Rule 144A deal were Goldman Sachs, Bank of America and Merrill Lynch.

AMG is based in Prides Crossing, Mass.

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