<convertible bond redemption>
In my mind it is clear that paying the 20% penalty is a good thing for the shareholders of ABTX for the following reasons:
(1) The current holder(s) of the $23.3 million in bonds have a vested interest in driving ABTX as low as possible by June 30 if ABTX is not going to exercise its option to repurchase them at the 120% premium.
(2) The mere existence of floorless convertibles (and other similar instruments if this somehow does not qualify as a floorless convertible) is a magnet for opportunistic shortsellers, and a major reason for long investors to look elsewhere if not invested and to reinvest elsewhere if already invested.
(3) IMO ABTX should sell at at least 1 times sales or (approximately) $8 if the floorless convertible issue is removed. It will cost the 20% penalty to retire them ($4.6 million or approximately $0.11 per share to retire them). I am willing to spend 0.11 to get 1.50 back.
(In actuality ABTX was trading at $5.50 when the convertible bond buyout was reduced so I think it's really worth $2.50 to the shareholders IMO).
(4) IMO ABTX by the end of 1999 should be a $10 stock by the end of 1999 (requires that they get earnings and cash flow solidly positive by 2Q of FY 2000). If they let the convertible bond price reset to $6 then they will have given the bond holders 3.9 million shares at $10 or $39 million. Better to give them 120% of 23.3 million now then to give them (stock valued at) $39 million at the end of the year.
All just in my opinion of course.
Here is the discussion of the convertible bonds from the latest quarterly:
As discussed in note C of Notes to Consolidated Financial Statements, on April 15, 1999, the Company announced its intent to pay off its $23.3 million of subordinated convertible debentures in full with cash to prevent a resetting of the amount of shares into which the debt can be converted. A significant portion of the redemption is expected to be funded with internally-generated funds. To the extent sufficient amounts are not available from internally-generated funds, the Company will need to obtain additional amounts from external sources. The difference between the amount paid to retire the debt and the amount reflected on the Company's books would be reflected as an extraordinary item.
During the nine-month period ended March 31, 1999, the Company sold $23.3 million of convertible debentures and 1.7 million warrants to purchase the Company's common stock. The Company received an aggregate of $25 million from this transaction. The debt is due on December 30, 2001 and bears interest at 5% per annum, which the Company has the option of paying in cash or the Company's common stock. The debt is subordinated to the Company's revolving line of credit. The debt is convertible into the Company's common stock at $13.68 per share, a 10% premium above the $12.44 price of the Company's common stock on December 29, 1998, when the transaction was priced. The Company has the option to redeem the debt every six months beginning June 30, 1999 at redemption prices beginning at 120% of the outstanding amounts and escalating thereafter. On each redemption date that the Company does not redeem the debt, the conversion price is adjusted to the market price at that time if such price is lower than the conversion price. In addition, the conversion price is subject to adjustment under standard anti-dilution provisions or, for five days thereafter, if the Company enters into certain capital transactions at prices less than the conversion price. On April 15, 1999, the Company announced its intent to pay off the subordinated convertible debentures in full with cash to prevent a resetting of the amount of shares into which the debt can be converted. The difference between the amount paid to retire the debt and the amount reflected on the Company's books would be reflected as an extraordinary item. |
