On April 7, 2010, Telvent (TLVT), a global IT solutions and business information services provider, priced an offering of $175 million aggregate principal amount of 5.5% Senior Subordinated Convertibles Notes due 2015. The notes were sold in a private placement to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1993, as amended. What that means is buyers are aware the debt issue is not registered with the SEC at the time of purchase and the rules governing such debt may or may not be modified by the SEC. The company has also granted the initial purchasers a 30-day option to purchase up to an additional $25 million aggregate principal amount of the notes. The offering is set to close on April 19, 2010, subject to customary regulations.
Interest will be paid semi-annually in arrears at a rate of 5.50% per annum on April 15th and October 15th of each year, beginning October 15, 2010. The notes will mature on April 15, 2015.
The notes will be convertible, under certain conditions, into cash, ordinary shares of TLVT, or a combination of both, at Telvent’s option. The conversion price of $34.18 a share was 22.5% above the April 6th close of $27.90, meaning that each note has an initial conversion ratio of 29.259 shares of TLVT ordinary shares.
Let us examine the pros and cons of an investment in Telvent stock versus an investment in its new convertible issue. With $1,000.00, one could buy one bond or about 36 shares of TLVT priced at $27.90 a share. At the close on April 13, 2010, the stock was priced at $30.35, an increase of almost 8.8% in one week. Our calculation determined that breakeven for the convertible at issuance would take about 4.5 years, if the stock price and dividend flow remained unchanged. However, the company is getting rave reviews from analysts and the stock has a consensus price target of around $40 a share over the next 12 months. If the stock reaches that target, recovery time could be significantly shortened. If the $40-a-share price target is reached, the conversion value (or parity) would be worth nearly $1,170, a decent return for a year’s wait. However, the stock would have seen a 47% increase. If the bond is held beyond a year, any increase in the stock would benefit bondholders, too, and with interest payments, the return would handily match any return from the stock at a reduced level of risk.
For more conservative investors with a long-term investment horizon, this convertible might represent an enticing, lower-risk option for investing in a “hot” company.