Rogers Sugar Income Fund announced yesterday a bought deal – they were issuing $50M in convertible debt. The salient part of their press release was the following:
The net proceeds of the offering will be used to redeem all of the outstanding $50 million principal amount 6.0% convertible unsecured subordinated debentures of the Fund due June 29, 2012. The redemption is intended to take place on or about June 29, 2010.
The $50M currently outstanding trades as RSI.DB.A. It had a maturity of June 2012, coupon of 6% and a conversion feature at $5.30/unit – before this announcement, the debt was trading very thinly at a price of 103-104. This implies a 4.1-4.5% yield, plus the option premium on conversion. The proper valuation of the debt actually is not a trivial issue considering you have to make some complex calculations with respect to the convertible option – Black Scholes will not cut it in this case.
In any event, Rogers Sugar refinanced the debt. The June 2012 debt also contains a call option, where the company can call the debt, as per the prospectus:
On or after June 29, 2010, the Debentures will be redeemable prior to Maturity in whole or in part from time to time at the option of the Fund on not more than 60 days and not less than 30 days prior notice at a price equal to the principal amount thereof plus accrued and unpaid interest.
So in other words, debt that was trading between 103-104 on March 18, 2010 will be redeemed at a price of 100 by the company on June 29, 2010.
Not surprisingly, the debt now is trading with a bid/ask of 101.75/102.00 and the only reason why this is above 100 is purely due to the value of a three month option with a strike price of $5.30/unit embedded in the debt. Debt purchased at 102 actually has a negative 0.5% yield when you factor in the call that will occur on June 29, 2010.
Investors would be very well to take note of any embedded call features in the debentures they purchase – especially if they are purchasing the debt for over par value.
The new debt issue of Rogers Sugar has a 7 year maturity and is 2.7% above government bond rates (coupon 5.7%; government 7-year benchmark is 2.96%), which is represents a rather cheap medium-term financing for the company. The $6.50/unit call premium is about 35% above market value and thus would minimize any dilution in the unlikely event that Rogers Sugar actually trades that high and thus the coupon cost is lower. I would have preferred that management lower the conversion rate to about $6.00/unit and have a smaller coupon on the debt, however.
