Bond of brothers

Companies in a similar predicament often try to reduce their liabilities by repurchasing bonds at less than face value. If successfully executed, this exercise can relieve the debt burden on the company. In theory, all investors benefit. But because such operations are perceived to benefit the shareholders at the bondholders’ expense, negotiations over them can be protracted. And sometimes, as in the case of Versatel, the Dutch telecoms group, the bondholders dig their heels in. Then repurchases don’t get done at all.

Getronics sidestepped this adversarial exercise by handing things over to the bondholders. It has created a framework by which they can effectively set the terms on which they convert their bonds into equity. It is allowing holders of its E850m of two convertible issues temporarily to convert up to 36% of the stock at a much lower conversion price. If executed, this should reduce the group’s outstanding debts by 33%, returning its debt obligations to investment grade status.

To ensure that this happens, Getronics has offered bondholders a significant incentive to tender. It has set a very low minimum conversion price. To give an example, if holders of one class of the convertibles tendered bonds with a face value of £1,000 at the minimum conversion price of E4.60, they would receive 217 shares worth E960.90 at Monday’s closing price. The same £1,000 nominal of bonds traded at about E685 on Monday.

That all looks fine for bondholders, but how does it help shareholders? Repaying debt almost at par dilutes their position. Here the cunning bit kicks in. To protect shareholders against dilution, the bondholders must bid in a bookbuilding exercise to set the final conversion price. To be more certain of exiting, they must offer to accept less stock in return for their bonds. That way fewer shares should be issued.

One thing that can stop restructurings in their tracks is antagonism between holders of the various classes of capital. The merit of the Getronics mechanism is that, by being self-regulating, it should minimise this friction.

Context

Getronics said it had temporarily lowered the conversion price on its two outstanding convertible bonds in a bid to cut its E1.2bn of debt.

The Dutch IT services group said it had cut the minimum conversion price for its E350 of 2004 bonds to E4.60 and for its E500m of 2005 bonds to E5.10. 

The maximum conversion would reduce Getronics' outstanding convertible debt by E306m to E900m, and cut its financial expenses after tax by E9.6m a year. Getronics said the restructuring would lead to dilution in 2001 earnings per share of 1%.

ABN Amro Rothschild coordinated the transaction.
 

Assignment: What were Getronics' choices? Assess the alternatives.