A growing number of companies are buying back call options on convertible bond issues--financed in part by sales of higher strike calls to banks--to hedge issuance. Call-spread transactions lower the net out-of-pocket cost of repurchasing the call and result in the synthetic creation of bonds that receive better tax treatment under mark-to-market accounting rules, structurers said.
"This is definitely a trend," one structurer said. "We're seeing more and more transactions like this." The reason for the pickup is attributed to growing comfort with the strategy. Amgen recently raised USD5 billion notional in convertible bonds--the largest issue ever, according to structurers--and then repurchased the call option for a net cost of USD1.5 billion. Albany International last week issued USD150 million convertible bonds and entered a concurrent share buyback with a call-option buyback.
