Computer Associates went ahead with a USD660 million convertible deal last week after bankers came up structured a call spread that helps mitigate the potential dilution of the company's shares through conversion. CA executives had been resistant to the idea of a convertible offering because they felt the company's stock was trading too low. They believed it would probably rebound to higher levels soon and they didn't want a low conversion price to lead to dilution.
To offset this risk, CA purchased from joint bookrunners Banc of America and Salomon Smith Barney a call option allowing the company to buy back shares when they hit the conversion price, set at USD24.33, a 33% premium above the USD18.30 level the stock was trading on the day of issuance.
To defray the cost of the call option, which cost the company USD95 million, CA sold a call option back to BofA and Salomon, allowing them to buy back CA shares if the stock price rises above the mid-30's, explained a banker familiar with the deal. He declined to disclose the precise price levels.
This second call option prevents the company from participating in the upside if the shares trade above the mid-30s, but according to the banker, the company needed the financing and felt comfortable with the thought of diluting the shares if they are trading at the higher valuation. The company is facing a cash crunch because of USD1.9 billion of debt coming due over the next 14 months. Suvir Thadani, a Salomon banker who worked on the deal, did not return calls. Calls to CA executives were referred to Jamie Tully, spokesman, who could not provide additional details.
The convertibles are non-callable until 2005 and have a 5% coupon, lower than the 10-11% coupon the company would probably have had to pay had it done a straight debt offering, the banker added.
