Computer Associates to Raise $500 Million In Note Sale

Its shares fell as much as 9 percent touching a session low of $17.79 but were trading at $18.37, off $1.16, in late morning New York Stock Exchange trade.

The Islandia, N.Y.-based company announced the private sale, which a person familiar with the matter said should take place Wednesday night. On Feb. 7, it had canceled a $1 billion bond sale when Moody's Investors Service threatened to cut its credit rating. Moody's cut the rating to its second lowest investment grade on March 1.

"They're two notches above junk, but they are moving the maturities out," says John McPeake, a senior software analyst at Prudential Securities, who has a "buy" rating on the company's shares. "This sale gives them more financial flexibility."

The Securities and Exchange Commission and the U.S. Attorney's Office in New York are making preliminary inquiries into the company, reportedly over how it records some of its maintenance agreements as software sales to boost revenue. The company has seen its costs of borrowing commercial paper rise, and last month drew $600 million from one bank credit line to pay off another.

"There is a lot of risk in Computer Associates, whether it's accounting issues or the investigations, but we don't see any near-term liquidity issues," says Mike Trigg, a stock analyst at Morningstar in Chicago, who recommends that investors "avoid" the company's shares.

Computer Associates says it expects to use some proceeds from its sale to purchase "call options" allowing it to buy back shares, and limit the potential dilution when holders convert the notes to shares. It says it will use the remainder to refinance existing debt, and for general corporate purposes.

Computer Associates' five-year notes are expected to carry a 5 percent to 5.5 percent coupon, and be convertible into shares at a 25 percent to 30 percent premium over the share price, a person familiar with the matter said.

The company says it may sell another $100 million of notes if there were enough demand, and will have an option to buy back the notes after three years.

Low Investment Grades

Moody's on Wednesday rated the notes "Baa2," its second-lowest investment grade, with a negative outlook.

It again expressed concern that the company's cash flow may not be sufficient for it to refinance maturing debt in the next 12 to 15 months. Still, it says a sale would help the company refinance $1.2 billion of bank debt and $575 million of long-term debt, due mostly in May and June 2003.

Morningstar's Trigg says "on the surface," the convertible sale "looks positive. It's impressive they can move that much in convertibles, but the company is trying to counteract the fact that convertibles dilute the stock."

Computer Associates had about 577.4 million common shares outstanding as of Jan. 29, according to a Securities and Exchange Commission filing.

S&P rated the notes "BBB-plus," one notch higher than Moody's, with a negative outlook.

"I would expect Computer Associates to be able to refinance or extend its debt maturities as they occur," says Philip Schrank, an S&P analyst, who also expects the company to make periodic acquisitions and share repurchases.

Banc of America Securities and Salomon Smith Barney, which were arranging the $1 billion bond sale, are arranging the convertible sale, people familiar with the matter say.

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