The downshift in ONI Systems stock, on the back of a general decline in the technology and telecom sector in the past few weeks, has created an investment window for the company's busted convertible bonds, argues Venu Krishna, research analyst at Salomon Smith Barney in New York. But some portfolio managers are having a hard time swallowing this advice, fearful that the market has farther to fall before the bottom is reached. "The paper could go still lower, particularly in this distressed market where odd things can happen," says a buyside portfolio manager..
The triple-C rated 5% convertible notes of '05 have a convertible price of 71% of par, and is undervalued by 10.4%, says Krishna. INO, whose only outstanding debt is the $300 million in convertibles notes, has raised expectations on revenues for this year to about $210 million from an earlier guidance of $180 million, and expects to have revenues break-even in the fourth quarter, adds the analyst. With a common stock price of $36.25 over a one-year investment horizon Krishna predicts an upside of 74% and a downside of 28% for a +/-25% move in the stock. He does acknowledge risk, specifically in regards to technology, execution and the possibility customers will slow their investments, but if the bonds fall to a convertible price of 60-65% it will be attractive to straight high yield and distressed investors.