Tuesday November 27, 12:24 pm Eastern Time
Many convertible issuers to avoid cash crunch
By Jonathan Stempel
NEW YORK, Nov 27 (Reuters) - When companies began selling ``contingent convertible'' bonds late in 2000, there was concern they might have to cough up wads of cash if investors exercised their rights to sell those bonds back in as little as a year.
Tyco International Ltd. (NYSE:TYC - news) must be glad they haven't.
The Pembroke, Bermuda-based security, electronics and financing conglomerate could have been forced this month to pony up $3.5 billion of cash to buy back all of the $3.45 billion of zero-coupon ``CoCos'' it sold a year ago. Instead, it had to pay only $10 million for a handful of the bonds.
And analysts don't expect many companies to have problems coming up with cash to pay off holders who exercise their so-called ``put'' options on CoCos.
``The majority of the issuers of these types of obligations tend to be investment-grade, and investment-grade tends to mean that companies should not have problems refinancing or rolling over debt,'' said Jonathan Cohen, vice president in convertible bond research at Deutsche Banc Alex. Brown.
Convertibles are stock-bond hybrids that usually offer current income -- zero-coupon bonds do not -- and can be converted into company stock.
They carry lower interest rates than regular corporate debt, and often have tax advantages that appeal to issuers. Companies have sold a record $94 billion of them this year, according to ConvertBond.com, a division of Morgan Stanley.
COCOS
In their zeal to garner the 2 percent fees typical of convertible offerings, and tap burgeoning demand from hedge funds, Wall Street banks created ``CoCos.''
These can't be converted until a ``contingency'' takes place -- the share price must actually rise above the official ``conversion price'' for a period of time.
This makes conversion less likely, and CoCos less appealing to traditional convertible investors. Hedge funds that sell ``short'' the underlying stock have instead been the big buyers.
In exchange for that onerous contingency provision, many CoCos carry ``put'' options that let holders sell the bonds back to the issuer, usually in a year or two.
Last November, Tyco sold $3.45 billion, or $4.65 billion in face value, of CoCos with a one-year put. It remains the largest ever U.S. convertible debt issue.
But according to ConvertBond.com, as of November 14 investors put back only $10 million of the bonds to Tyco.
``Tyco's stock price rose to a point where the bond's theoretical value rose above the put value,'' said Cohen. ``The bonds were puttable on Nov. 19 at 75.282 (cents on the dollar), and the bond closed at 78.34. There was no reason to put it.''
Meanwhile, Tyco's share price had risen from its low of $39.24 on Sept. 21, to $58.01 on Nov. 19.
Michael Knox, a portfolio manager for Hamilton Partners in New York, kept his Tyco bonds, having pegged the share price at which it could make sense to convert at around $50.
``There were probably some retail investors that (sold who) didn't understand the put,'' he said.
35 COMPANIES FACE PUTS
Other companies, though, could soon have to dig deep.
``There are quite a few players that have some fairly chunky refinancing activities coming up,'' said Cohen.
Indeed, 35 companies face put dates on their convertible debt between now and the end of 2002, ConvertBond.com said.
The next comes from Philadelphia-based cable company Comcast Corp. (NasdaqNM:CMCSA - news) (NasdaqNM:CMCSK - news), which has $1 billion of CoCos with a December 19 put date. It, like Tyco, said it intends to pay cash for any CoCos that bondholders put.
And in May of 2002, Cendant Corp. (NYSE:CD - news) and Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT - news), two companies in the battered hospitality sector, face put dates.
Most CoCo issuers, though, carry investment-grade ratings. Analysts said these issuers are likely to find it easy to use cash, or issue new regular or convertible debt, if they are forced to take back much of their older convertible debt.
``Most companies with zeroes coming due in the near future are pretty well positioned to deal with puts, and aren't likely to disrupt the convertible market,'' said Knox.
``It's only a problem when the stock is down severely,'' he said, ``and (there is a question of) whether the market still has an appetite for the company's securities.'' |
