Steven, no, you are not mistaken, until recently, HEC had done a fantastic job of raising money with fixed conversion rate debentures and had more than $100 MM in the coffer to show for that effort. The last $135 MM raised (bringing their "money in the till" to $200 MM or so) is where they are starting to deviate from that. Yes the European debenture has a "far in the future" floorless feature and I have no prior experience with such time bombs to even guess their impact.
In this case, I put myself in the shoes of the floorless bandit and ask myself how can I maximize my returns? In the case of the 1998 debenture (the recent $85 MM), my strategy would be simple. When the stock gets a little above $6.5 I would short an equivalent amount of shares in the open market (about 13 MM shares, and I pray for a good solid piece of news to short into, ain't easy to lay out such a big short position), using my convertible as a collateral. I get back all my $85 MM which I can now invest in another debenture. Since HEC is not expected to pay dividends for few years, I have no cost of holding that short even if the stock goes to $100 per share. I wait until the issue is due for redemption (sometimes in the 2002 -2003 time frame), collect my 5% interest or $4,25 MM annually) while I am free to use the $85 MM to do anything else I want. If by "chance", the weight of my short selling causes the stock to go down, I can cover at a lower price and make a fast additional 10% or if I knew what I was doing even 30% (the recent resistance at $4.5/share could very well be due to such covering). Now of course, my $65 MM (I made $20 MM on the short side with no risk of being squeezed, mind you) is again committed. The stock goes back to $6.5, I say "thank you" and repeat the same thing, why, in four five years I could not only make my 5% per annum, but have in essence a risk free way of making much more than that. When does the game end? If HEC comes up with an elephant field and the stock stays permanently above $6.5/share, well, in this case I collect my $4.5 MM annually and I have my money (the whole $85 MM) to do other things with since I am short against the block. If such an elephant show itself, well I can even be generous and wait with my shorting until the stock get to 13 (doubling my money and on top of that getting paid $4.5 MM each year with no money committed). Would you fault me as a floorless bandit from doing this until 2002? OK, now we are at 2002 or so, if the stock run away, I am whole. If the stock is still languishing under $6.5 I can unwind my position by converting in a floorless manner and sell the additional shares I have at a nice additional profit. If the company debt load is indeed heavy, I can even get it into a death spiral, but such an eventuality is what I call the long term "time bomb". Nothing immediate.
Of course, HEC needs to find another $800 MM to accomplish its business plan, and having breached its door to floorless bandits once, may force them in the future to accept ever more obnoxious floorless instruments.
Zeev |
