L-3 $350 mln convertibles talked at 3.75%-4.25% yield, 23%-27%% premium

By Ronda Fears

Nashville, Tenn., Oct. 18 - L-3 Communications Corp. launched $350 million of 10-year convertible senior subordinated notes Thursday with pricing guidance of a 3.75% to 4.25% yield and 23% to 27% initial conversion premium. Bear Stearns & Co. and Lehman Brothers are joint lead managers of the Rule144A deal, which is scheduled to price after the market close Thursday.

There is a $70 million greenshoe available on the convertible offering. The new convertible will be pari-passu with L-3's existing convertible and straight debt, so there is no structure subordination. Sources working on the deal also said that there would likely be a contingent conversion feature added with a 120% threshold, declining to 110% at maturity.

A sell-side analyst said the mid-range of the price talk on the new deal would put it pricing about 6.5% to 7.0% cheap to fair value, assuming a credit spread of 350 to 360 basis points over comparable Treasuries and 35% volatility in the stock. The credit spread is comparable to where L-3's straight debt is trading, the analyst said. However, the analysts noted that the impact of the contingent conversion feature, if any, was a wild card to the valuation.

New York-based L-3, a supplier of secure communications systems and products to the U.S. Department of Defense, U.S. government intelligence agencies, aerospace contractors and commercial customers, said proceeds would be used for general corporate purposes, including acquisitions. Earlier this month, L-3 announced a definitive agreement to purchase all of the outstanding common shares of Spar Aerospace Ltd. for C$15.50 per share for a total net value of about C$182 million.

Earlier Thursday, L-3 reported net income rose to $33.4 million, or 82c per diluted share, from $24.1 million, or 69c per diluted share. EBITDA rose 19.3% to $97.5 million from $81.8 million, and operating in come gained similarly to $95.2 million from $62.8 million. Revenues were up 20.2% at $618.2 million.

Demand for L-3's high-technology defense electronic products have increased, said Frank Lanza, chief executive of L-3. L-3 provided spares and support services to aid the U.S. government's immediate deployment and planning is currently under way to see how best to meet the government's potential requirements in fourth quarter, into 2002 and beyond, he said.

"However, in light of the terrorist attacks of Sept. 11, L-3, like many in the industry, has been called upon by the government for immediate assistance in the current conflict and to see how, if needed, the company can increase its support of U.S. forces," Lanza said.

L-3 common shares closed down $3.17 to $86.03.

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