Puttable bonds have continued to cause problems for US issuers over the past 12 months. Deals were done on terms that at the time seemed attractive, if not almost free for some. Now many of those puttable convertibles are trading so far out of the money that investors, whether straight convertible players or the hedge funds that now seem to own up to 80% of US convertible outstandings, are choosing to exercise their puts rather than wait around for stock prices to improve.
And that can leave some issuers facing a liquidity crisis. Sanmina Corporation, one of the largest electronics companies in the US, was one such company, but it acted early and decisively. It had a $707 million puttable bond on the horizon in 2005 and another, for $682 million, due to mature in 2004. It also had a $200 million account-receivables securitization deal up for renewal in 2003. “These were two sizeable converts which were weighing on the company’s stock price and medium-term funding outlook,” says Joe McGrath, head of US high-yield debt at Goldman Sachs. “There were some nervous banks out there. It was a fairly large obstacle for the company.”
Sanmina also has a three-year revolving credit facility with its banks due for renewal in 2004.
The solution was to issue a high-yield bond together with a leveraged loan bought solely by institutional funds, not a bank syndicate. The loan is fully secured by the company’s assets, which helped to attract enough interest from institutional accounts to allow sole underwriter Goldman Sachs to increase the deal by $25 million to $275 million. A spread of 400 basis points over three-month Libor also helped to attract them.
The high-yield bond included a second lien feature that provided the ability to reduce the amount of junior debt in the company’s capital structure. That added extra comfort for investors. “We probably could structure the deal differently now, but at the time we needed an extra wrinkle to attract investors,” says McGrath. At the time the deal was done, in December, there had just been $400 million of outflows from high-yield mutual funds, and there were a lot of other companies in the market. That week 17 deals priced, raising a total of $3.5 billion. The second lien wrinkle was more than enough to interest investors, though, and the deal was increased from $450 million to $750 million.
“We sold the bond both to investors in the outstanding convertibles as well as to those less familiar with the name,” says McGrath. “Between the two deals we managed to achieve the aim, which was to reduce concerns about their medium-term liquidity and thus refocus investors’ attention on the company’s operating performance.”
