While recent capital market action has been concentrated on equity raises by E&Ps in favored areas—mainly the Permian Basin and Scoop/Stack plays—growing confidence in a commodity price recovery has led to use of a widening array of financial instruments. In addition to equity offerings, lately capital market moves have included a preferred stock issue, a high-yield deal and, notably, an exchangeable senior note offering (aka convertible issue) through which Weatherford International Ltd. raised over $1 billion.

The issue by oilfield service provider Weatherford achieved dual goals. It largely de-risked the company’s balance sheet, and at a substantially lower level of dilution than if it had issued straight equity. The deal was upsized from an initial $1 billion to $1.265 billion, including full exercise of the overallotment option. Terms called for an exchange, or conversion, ratio representing a premium of roughly 40% over Weatherford’s closing price of $5.53 per share when the deal was announced.

Proceeds from the newly issued notes, which mature in 2021, will allow Weatherford to fund a tender offer for at least two maturities coming due: $600 million of 6.35% notes due 2017, and $400 million of 6% notes due 2018. While Weatherford also has maturities in 2019 and 2020 ($1 billion and $770 million), the note offering gives the company much-needed additional runway at lower costs. Carrying a 5.875% coupon, the new issue will save Weatherford about $5.6 million in 2017 and 2018 combined.

Importantly, assuming an upturn in the oilfield service sector, conversion of the notes into Weatherford equity would take place at about $7.74 per share (conversion ratio: 129.1656 shares per $1,000 note). This represents a premium of about 40% to Weatherford’s closing stock price of $5.53 per share on June 1, the date the offering was announced. And, the higher conversion price entails significantly less impactful dilution to existing investors than would a straight equity deal.

In upgrading Weatherford to Overweight from Neutral, Simmons & Co. International said it supported the transaction, as “we believe it materially improves the financial resilience of the company and allows management to more fully concentrate on running/improving the operational business as opposed to repeatedly being enveloped, with increasing frequency, by serial crises.”

Others were also favorably disposed. Barclays said, post-deal, Weatherford was “investible” again, as it also brought the stock up a notch to Overweight from Equal Weight.

Given the shift in the crude oil outlook (see “Sentiment Shift” in this issue), is it time for issuers to look to convertible securities?

“Convertible bonds are now finding their stride,” said Andrew Apthorpe, global co-head of convertible and equity-linked origination at RBC Capital Markets, which served as sole structuring advisor, lead left book-runner and dealer manager on the Weatherford transaction. “They offer a means of minimizing cash interest, while at the same time minimizing dilution if you can achieve a decent conversion premium. With the conversion feature, they’re cheaper than straight equity on the upside; and they’re cheaper than debt on the downside.”

For Weatherford, a key part of the strategy was to eliminate the overhang of near-term maturities and give the company greater capacity to operate its business, ending a “cycle of negativity” and sparking instead a “virtuous cycle upward,” said Apthorpe. “Our thesis was that if we cleared out the near-term maturities with a large-enough deal, credit spreads would go lower, credit default swaps would also go lower, and the equity would rally higher in lockstep. This deal fueled a rally in all those risk metrics.”

In the first three trading days after the deal was announced, Weatherford’s stock closed at $5.89, $6.12 and $6.62/share, up from $5.53 at launch. “The beauty was that Weatherford was able to raise over $1 billion of capital without any impact on its share price,” said Apthorpe, who noted that placement of the offering mainly with long-only investors rather than hedge funds.

An additional feature is that when notes are exchanged in the future—hopefully reflecting equity appreciation, from the investor’s point of view—Weatherford has the option to settle in cash or stock, or a combination thereof. From the issuer’s perspective, “if the stock ends up going lower, it’s just a cheaper bond deal,” said Apthorpe. “And if it ends up going higher, then they cash-settle the principal and they minimize the dilution on the upside.”

While sometimes called complex, converts have proved their worth for Weatherford—and perhaps will in other deals to follow.