NIHD: I Was Too Quick To Criticize NII’s Convertible Note Offering

When Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) announced a convertible note offering my initial reaction was that it would probably benefit the bankers and noteholders more than the shareholders. Now that the details have been released, I think I spoke too soon.

NII Holdings, Inc. (Nasdaq: NIHD) today announced the pricing of its offering of $1,000.0 million principal amount of 3.125% Convertible Notes due 2012. The notes were privately placed with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the notes is expected to close on June 5, 2007. NII has granted the initial purchaser of the notes a 13 day option to purchase up to an additional $200.0 million principal amount of notes.

The notes are convertible under certain circumstances into NII common stock at a conversion rate of 8.4517 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $118.32 per share), subject to adjustment in certain circumstances. Upon a surrender of notes for conversion, NII will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock.

That conversion rate means the stock will have to return an average of 7.85% annually for the conversion option to be in the money at expiration. Although shareholders are likely hoping for far higher returns than 7.85%, that rate does provide an acceptable hurdle. Compared to Xilinx’ (XLNX) offering, which paid a higher interest rate and a conversion price that required just 0.7% growth per year it seems downright stingy.

NII intends to use up to $250 million of the net proceeds from the notes offering to purchase shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

At current prices, the $250 million buyback would soak up 3.1 million shares, but over time the notes can convert into at least 8.45 million shares (depending on whether the overallotment is exercised.) In order to buy back the full potential dilution of the bonds, the company would have to shell out $686 million of the proceeds. The remaining $314 million, along with the 3.125% paid on the entire principal, means the effective interest rate assuming a full offsetting buyback would be 9.95%. This, in effect, is a most-conservative way of looking at the issue. While a bit high (again, this is the most-conservative estimate), 9.95% doesn’t seem exorbitant for a company with NII’s credit rating.

All in all, it looks to me now like NII negotiated an agreement that is fair to both noteholders and shareholders.

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Topics: NII Holdings (NIHD), Stock Market, Xilinx (XLNX) | RSS

2 Comments on “NIHD: I Was Too Quick To Criticize NII’s Convertible Note Offering”

  1. [...] NIHD: I Was Too Quick To Criticize NII’s Convertible Note Offering [...]

  2. [...] I have commented before that Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) appears better than others at negotiating financing deals that don’t favor one class of investors over another. But that doesn’t mean that its creative financing deals won’t end up being expensive: NII Holdings, Inc. announced that it has commenced a tender offer with respect to its 2 7/8% Convertible Notes due 2034 in which it is offering to pay a cash inducement premium of $80.00, plus accrued and unpaid interest up to (but not including) the conversion date, for each $1,000 principal amount of Notes that are validly tendered and accepted for conversion into shares of the Company’s common stock pursuant to the terms of the Offer and the Notes. The Notes are currently convertible into shares of the Company’s common stock at a conversion rate of 37.566 shares per $1,000 principal amount of the Notes. The outstanding Notes have an aggregate principal amount of $300,000,000 and are redeemable by the Company beginning on February 7, 2011. Assuming all of the outstanding Notes are tendered for conversion pursuant to the Offer, the Company’s total cash payment to the holders of the Notes, including the inducement premium and accrued and unpaid interest, would be approximately $28.2 million and would be funded from cash on hand. The total number of shares of the Company’s common stock issuable upon the conversion of all of the outstanding Notes would be approximately 11,269,800 shares. Based on the number of shares of the Company’s common stock outstanding on June 10, 2007, if all of the outstanding Notes are converted into shares of the Company’s common stock pursuant to the Offer, the number of outstanding shares of common stock would increase to approximately 163,157,450 shares. Full conversion of the Notes also would reduce the Company’s total consolidated debt by $300.0 million and annual interest expense attributable to the Notes of approximately $8.6 million would be eliminated. [...]

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