My largest Convert position is in SEPR. Sepr has three converts out - a 7% due in 12/05, a 5.75% due in '06 and a 5% due in '07. The total debt is over $1.1B. SEPR has over $600M cash today. It also has sales of ~$200M/yr, going up. The stock is at ~$5.50/sh, with >84M shares out.
I own the 7% of '05. It is trading at 58-60 now. The yield to maturity is ~24%. Even though SEPR has three-four drugs in Phase III, and several NDA's scheduled to be filed, the market doubts that any will make it to market. The company has said that it will be profitable in '04, but the market doubts it. Since I hope that it will have at least $300M of sales by '04 and at least $400M of cash left, it seems that the down-side on the bonds are limited. If the company does not get anything approved and can't refinance, it will go under and the bond holders will then own the company. The company should be worth at least 1 times sales, or $300M. If added to the cash of $400M, the enterprise value would be $700M or about 63% of the face value of the debt. If you throw in $100M of costs for a Chapter 11, you still are near the current value of the bonds. This gives no value to the pipe-line at all. But the company may not be worth 1 times sales either.
I have stated many times on the SEPR board that the company should be buying the debt at big discounts. That would reduce the risks for everyone. |
