Convertibles: The Equity Linked Award

The use of convertibles is generally not commonplace despite the low coupon rate. The likely explanation is the high cost in terms of equity dilution. This year we reinstituted this award reflecting increased activity in this category by a widely diverse group of borrowers including Hornbeck Offshore, FreeSeas and China Shipping Development.

In September, FreeSeas announced its plans to issue up to $22 million of senior convertible secured notes due 2011 to private investors. The proceeds were to be used to acquire more modern handysize vessels. From our standpoint, the significance of this transaction was that it served as a bellwether of market sentiment. How would the market receive a debt offering, properly priced with upside, from a company with a market capitalization of $30 million? Or, in other words, can a very small cap company utilize its access to public markets to grow? Unfortunately these questions will remain unanswered at this time, as the company has decided to defer the deal as announced.

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