Juniper, Lucent Jump on the Convertible Craze

Once the last refuge of the destitute, the convertible-bond market is doing brisk business nowadays.

Just a day after networking gearmaker Juniper ( JNPR) sold a bunch of bonds, rival Lucent ( LU) became the latest high-tech outfit to embrace this cheap form of refinancing.

Juniper on Tuesday placed $350 million worth of so-called zero-coupon convertible bonds, which pay no interest but give holders the right to swap their debt for stock later. After the market closed Wednesday, Lucent rolled out its own $1.3 billion convertible offer. Specific terms weren't available, though recent deals suggest the bonds will carry a significantly lower interest rate than other Lucent debt.

Not long ago, convertible bonds carried a stigma because selling them promised to dilute current shareholders, pushing down share prices. But now, investors seem less apt to tar all issuers with the same brush. For instance, Wall Street darling Juniper held its ground Wednesday, rising 8 cents to $13.97, but still-struggilng Lucent dropped 6% in after-hours trading following its announcement.

In any case, at the terms being offered, companies would be foolish not to rush to the market, some observers say.

It used to be that "when a tech company went for a convertible, it usually rang a warning bell," says a New York money manager who has no Juniper positions. "Now, I see some of these deals and I think there may be too much money in the market and they've got to put it to work."

The Deluge

Bond observers say the end of the Iraq war and a flood of investor money combined to make convertibles one of the hottest loan markets around. There were a record-shattering 26 convertible bond deals in the past two weeks, according to convertbond.com.

In Juniper's case, the company gets $350 million in cash, interest-free. The hitch is that in five years it must swap new shares for existing bonds at a price 45% above Tuesday's close of $13.89 a share. That could, of course, dilute existing holders by flooding the market with new shares, assuming Juniper stock continues its recent rise.

But the refinancing side of the deal is obviously attractive to the company, observers say. Though Juniper didn't specify how it would use the cash, analysts say they expect the company to use most of it to pay down the $942 million balance due on a $1 billion convertible it issued in 2000. That bond, notably, carries a 4.75% interest and comes due a year earlier, in 2007.

Some Wall Street analysts estimate that if Juniper retires $350 million of its existing convertible, it could remove about $19 million in interest expense -- which translates to between a penny and 3 cents a share in annual earnings.

Guessing Game

With that kind of math at work, tech watchers expect a procession of debt-laden tech companies to issue their own converts soon. Lucent's move Wednesday illustrates the thinking.

Of course, Lucent has been here before, back when the convertible wasn't seen as such a sporty model. During some of Lucent's darker hours, finding no comfort with bankers and other creditors, the company made two visits to the convertible market for quick cash. In August 2001, Lucent raised $1.9 billion through a convertible issue. The company returned seven months later for $1.7 billion more.

The infusion provided the critical life support that helped to get the teetering gearmaker back on its feet. But the repair bills are huge: Lucent pays interest of 8% and 7.75% on the bonds, and the first one comes due in August 2004.

In an effort to get out from under the onerous obligation, Lucent has been feverishly buying back the bonds and, in most cases, converting the bonds to common stock. As of last month, Lucent had reduced the outstanding balance on its first convertible by 50% to $943 million, while trimming its second convertible by 34% to $1.1 billion.

Still, the conversions have been painful for shareholders, who have seen the company's share count increase by more than 15%.

That in mind, some observers warn that there isn't necessarily a correlation between heavy convertible bond market activity and a strengthening tech market. Most convertible deals are structured in a way that is favorable to certain traders known as arbs who specialize in playing the risks of one type of investment off against another.

In other words, most of these deals are well out of reach of the average investor. Even so, don't be surprised if a whole crowd of tech shops rush to follow the Lucent-Juniper lead.

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