You can almost set your watch—or at least your calendar—by Jarden Corporation’s convertible bond issuance. But some of the subtle differences in how the company has used convertibles to raise money may provide insights not only into how the company sees its own stock and capital structure but also into today’s opportunities for convertible issuers.
Jarden may be best known for its collection of brands such as Coleman camping goods and Mr. Coffee that once belonged to Sunbeam in the days of the infamous “Chainsaw” Al Dunlap. Back in September 2012, the consumer-products conglomerate first ventured into convertible land, raising $500 million while using about a quarter of the proceeds to repurchase stock, offsetting a substantial portion of the potential dilution from the bond. The stock at the time traded at the equivalent of about $35 per share (it had a 3-for-2 split about a year ago).
That convertible carried a 1.875% coupon, a six-year maturity and a 34% conversion premium. The math behind a convertible with this kind of structure requires about half of the proceeds to be spent on stock repurchases to keep the stock from falling if the entire deal goes to hedge funds, which need to sell short a portion of the underlying shares. (The company either buys shares directly from the hedge funds or indirectly through an option package from the bond’s underwriters. In the latter case, the underwriters effectively hedge themselves with stock bought from the hedge funds). But since hedge funds generally buy half or less of a new deal, using a quarter of the proceeds for a stock buyback is typically sufficient to alleviate all the near-term pressure that hedging might cause. Indeed, the stock rose almost 4% from its close the day before the deal was announced to the level off which the convertible was priced.
Last June, after the stock split, Jarden came back to the market to raise $265 million with a new convertible. Unlike the previous convertible, which stipulated a substantial repurchase of common shares, the second deal was simply for general corporate purposes. Some of these purposes turned out to be last September’s purchase of Yankee Candle, the iconic New England brand. Anyway, the convertible was priced off shares just below $45, about 28% higher than the level used for the first convertible, which had appreciated about 15%. The new issue’s structure was pretty similar to the first one—a six-year maturity, though a bit more equity-sensitive, with a lower coupon of 1.5% and a slightly narrower 30% conversion premium.
When it announced the $1.75 billion, Jarden knew it would need a lot more cash than the proceeds from the convertibles. Seeing its shares leap over 10% on the Yankee Candle announcement, Jarden used the opportunity to raise about $750 million by issuing new shares to the public. The net proceeds of the two convertible deals and the stock issuance provided about 80% of the funds needed for the big acquisition.
Fast forward to Tuesday morning, with Jarden’s shares closing Monday within 1% of an all-time high. The company once again took a measured, yet aggressive, step, announcing a $600 million convertible. We often see cases of “repeat offenders” like Jarden in the convertible market. Many prospective issuers are frightened off by the seeming complexity, but once a company gets familiar with the flexibility, convenience and cost-effectiveness, it frequently comes back for more. This is especially true when the stock performs as Jarden’s has. Once a convertible reaches the level of the first bond (now well above 140 cents on the dollar), its risk/reward properties are no longer as favorable as when it was issued, and it becomes closer to a stock surrogate. Traditional convertible investors thus welcome the opportunity to reinvest in a new convertible less geared to the stock.
That’s what makes the new Jarden convertible noteworthy. This bond’s structure is quite different from the first two. It has a 20-year maturity with a 10-year put option. Convertible professionals will tell you that there’s a huge difference in modeling a 10-year bond from a five or six-year one, especially given a reasonably steep yield curve. Put another way, the first two Jarden convertibles, had they lacked a convertibility feature, would have been worth somewhere in the low-to-mid 80’s. The new, longer-dated bond is worth substantially less as a straight bond, probably about 20 points less than the first two. Thus unhedged investors are taking substantially more risk, and hedge funds will need to short a lot more shares.
Whereas it was only necessary to spend about a quarter of the deal proceeds on stock to offset initial hedging pressure, this deal will probably require 35-40%. The company did say that it was budgeting $250 million of the proceeds for stock repurchase, and sources tell me that a significant part of the new deal is indeed going to hedge funds in this type of transaction.
It’s worth noting that Jarden, which has a substantial amount of debt, has been meticulous in spreading its maturities. The biggest cluster falls between 2017 and 2019, including the two older convertibles. To this point the stock’s appreciation has made those convertibles seem unlikely to pose any challenge in being repaid. The new convertible will not come due until the 2024 put, making it the longest-dated maturity on Jarden’s balance sheet. (The company has an assortment of perpetual floating-rate notes as well).
Presumably Jarden chose this longer-dated structure both to keep from having to pay off too much debt by 2020 as well as to capitalize on the stock’s appreciation. All of the company’s moves thus far reflect a commendably savvy ability to raise money under favorable conditions. If Jarden’s new longer-dated structure is a harbinger of future convertible transactions, though, investors should recognize that the downside protection for which they buy convertibles may be slipping away. It’s worth noting that, unlike its announcement-day performance with its previous deals, Jarden’s stock closed down Tuesday.
