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Non-Tech : Any info about Iomega (IOM)?
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To: Jeffery E. Forrest who wrote (9701)10/22/1996 1:42:00 PM
From: IceShark   of 58324
 
Jeff: You seem a little confused on convertibles. Convertible debt can be thought of as a hybrid debt/equity instrument. Generally speaking (I will ignore all the detail and unique features - I haven't studied IO's bond), a convertible bond is a "normal" bond issued with a kicker provision allowing the holder to convert the bond principal at some point in the future into stock at a specified rate - for example $9/share. The conversion rate is usually 15 to XX% below the stock price at the time of bond issuance. For this kicker/sweetener the issuer gets a lower interest rate on the debt and also gets more cash than the alternative of selling stock at that point. The bondholder gets a stake in stock price appreciation; in this case the bondholders are doing great - so far.

When discussing debt issues, other people are saying "Hey, don't worry about cash repayment of IO's connvertible bond as long as the stock price remains above $9. The bond will be paid off with stock not cash." Well, this is true, but not necessarily something that should make existing stockholders all warm and fuzzy. Assume IO is trading at $30 when conversion occurs. Think of it as IO selling stock at a deep discount price of $9 to pay off this old debt. A dilution of existing shareholder interests. This is what the accountants are thinking about when they calculate fully diluted earnings per share. But, if IO is trading at $30 when converstion occurs I don't think existing stockholders will begrudge them the profit.

If IO is trading under $9 on the due date, cash repayment of the bond will be one more problem on a long list. Hope this helps.

Regards, DWW
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