Memorex Telex International NV has done nothing to advance the cause of junk bond financing of computer-related companies – and a very good thing too, prudent observers will say. Because Memorex shares are not currently traded on any stock exchange, little financial news emerges from the company, but the company does have junk bond issues out, notably a $557m line of 13.25% senior notes underwritten by Drexel Burnham Lambert Inc in July: the Wall Street Journal has been looking at what has been happening to the bonds since then, and it makes dismal reading. Just five months later, traders say, the notes are being offered at just 60 cents on the dollar, but there are few takers, despite the usurious credit-card-style yield of an implied 22% implied because the price is saying that most potential buyers don’t believe that Memorex will be able to meet future interest payments. You bought the bonds in July? If you have to sell now, you might get 50 cents on the dollar. The problem is that immediately after the issue, Memorex was hit by delays in shipping its new top-end disk drive, and IBM slashed prices on 3270 display terminals, which account for 28% of Memorex’s turnover. The company is going through product transitions in other parts of its line and has had to discount old inventory all of which meant that operating profit before goodwill fell to $18.2m in the third quarter from $54.5m in the second, which means that it covered only 35% of interest payments due for the quarter. Lack of cover sends the bondholders running for cover. Worse, that put the company into default on its bank covenants. It has now had to agree to repay $200m of bank debt over the next 15 months – how is it to finance that? Another junk bond issue? Not a prayer. Memorex insists that things have turned up sharply in the current quarter, sales of 3270s are picking up, the disks are coming through and it had a very good November, as well as being close to signing its biggest order ever. It is clear that Memorex urgently needs to replace its vast debt with equity, but just now, with an aura of doom surrounding the whole of the IBM world, is hardly the best time to make an initial public offering, so Memorex has little alternative to plough on and hope to generate enough cash from operations to service its debilitating mountain of debt – as key suppliers Fujitsu and Hitachi hover like vultures, hoping that they will be able to pick up a vast marketing network for their most important products at a bargain basement price.
