Wachovia issued USD2.5 billion in subordinated notes last week in a transaction resembling a mandatory convertible that carries additional options. But since the issuer substituted preferreds for common, the securities will not have any equity dilution upon conversion. The sale was managed by Wachovia Securities.
In most analogous cases the corporation issues a senior note which converts into equity at some point down the road along with a forward purchase contract. On the date of conversion, investors return the bonds to the issuer for remarketing and receive common stock. In this case, Wachovia, which set up a trust for the issuance, started out with a more junior security--a subordinated note--and said it would exchange the bonds for preferred in five years.
The benefits are tax deductibility on the interest payments for the first five years and no dilution upon conversion. Wachovia also obtained 75% equity credit from Moody's Investors Services on the WITS (Wachovia Income Trust Securities), which helps maintain its credit rating.
"Under certain conditions, the conversion accelerates, which is also beneficial to the issuer," said Barbara Havlicek, chair of the new instruments committee at Moody's, referring to potential drops in key ratios such as total and Tier 1 risk-based capital, and leverage. Calls to Thomas Wurtz, Wachovia's treasurer, were fielded by Christy Phillips, a spokeswoman in Charlotte, N.C., who declined to comment.
