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Converting the converted

When companies sold large convertible note offerings at incredible conversion prices during the last convert window in 2000, seasoned observers knew that these deals couldn’t stay on companies’ balance sheets for long. Sure enough, many of the companies that sold these deals have already taken advantage of the currently low interest rate environment to clean up their balance sheets.

But with the convert market showing signs of fatigue, current debtors could be quickly left with fewer options to issue new notes or buy back their paper. Thus, a look at how some of the former debtors managed their liens after the prior window closed can shed some light on what lies in store for the current group of companies that haven’t yet moved to shore up their debt. Their experiences also hold some lessons for the companies that are selling note deals now.

So far, no fewer than 25 companies have jumped through this convert window, which began on May 21 with an $80 million deal by dermatology play Connetics Corp. (CNCT, Palo Alto, Calif.). Those companies have raised $3.4 billion, which includes a $100 million convert deal by Medarex Inc. (MEDX) that closed last Friday (see "Debt Raisers," A2 & "Debt Managers," A5).

The main lesson is that convertible debt - more so than equity - must be managed. And because it entails multiple variables - including stock price, interest rates and secondary market trading - convertible debt can take on a life of its own, which may not come up when bankers pitch these deals to cash hungry companies. Thus, the key message to the sellers of today’s converts is that issuing this kind of debt is not just a way to pick up a quick quarter of a billion bucks. Rather it should be looked at as a process that requires active management by sophisticated CFOs.

The hardest lessons are

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