Suppose you could raise $300 million at 3.5%-interest that doesn't have to be paid until the deal reaches maturity. You could pay off your commercial paper, which is at 6.9%, and invest the balance in A1-P1 paper, which pays 6.5%, until a great business opportunity comes along. It sounded like a good deal to Global Marine Inc. Those are the terms of a deal the Houston-based offshore drilling contractor made in mid-June when it issued zero-coupon convertible bonds. Three other drillers, another service firm and a producer did similar deals this summer: Transocean Sedco Forex Inc., Diamond Offshore Drilling Inc., Nabors Industries Inc., Devon Energy Corp. and Weatherford International Corp. It didn't matter whether the companies needed capital to complete a deal. The debt was so cheap that executives just decided to jump on the chance to take it. "The conclusion we came to was that this was a window that had opened that wasn't going to stay open. People would rush through it, and pretty soon the demand would be soaked up," said Dennis Smith, Nabors director of corporate development. "It was more of an opportunistic move to get to the head of the queue and get it done. From the day we made the decision to do it until it was done, it was less than 48 hours." Zero-coupon convertible bonds give the buyer the option to convert the debt into shares of stock. Rather than receive regular interest payments, the buyer buys the bond at a discount to its $1,000 face value. The discount is based on a yield to maturity ranging from 2.5% to 3.5%. At any time, the buyer can sell the bond at market value or convert it into a fixed number of shares of the issuer's common stock. The bondholder can cash in on the issuer's improved stock value, or at least earn a small interest reward in the odd chance the stock price doesn't improve by more. "The worst case is if we don't do anything with the money for three years," Smith said. "Our first call is three years from June. Assuming the stock equity value is in the money on the conversion premium, when we first force conversion, we will have earned probably $90 million in possible interest income from just investing the bonds in investment grade paper. That is the worst case. Our intention is to find opportunities to invest the money internally in the business or if acquisition opportunities present themselves." The window Smith spoke of is now closed. The market's demand for these bonds, even from investment-grade companies, has been satiated. "I'd love to own some of these, because the companies that are issuing them are very attractive," one portfolio manager told the Wall Street Journal. "But the prices, well, let's just say that they're very, very attractive to the sellers rather than the buyers." -Jodi Wetuski
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