Convertible Notes - What strategy should IOC follow???

[Stavros]

Regarding the Convertible Notes ( IOC description is below courtesy of Palm in another Thread ).

On November 10, 2015, IOC can redeem the Convertible Notes in any combination of cash and shares. They acquired on the order of 810,000 shares (correct my number please) in their Share Buy Back Program in hopes of using them to fully redeem the Convertible Notes. It seems that won't happen due to the delay in resource payment and (hopefully) subsequent PPS rise.

So, what should IOC do?

1. Redeem the Convertible Notes using the 810,000 shares plus top up with cash as necessary?

2. Redeem fully in cash and keep the shares until they (again hopefully) appreciate when resource payment is made and PPS rises????

3. Buy more shares on the open market and redeem fully in shares?

4. ???

IOC's ORIGINAL STATEMENT

"Unsecured 2.75% Convertible Notes - - - On November 10, 2010, we completed the issuance of $70.0 million of Convertible Notes with a maturity of five years (November 10, 2015).

The Convertible Notes rank junior to any secured indebtedness and to all existing and future liabilities of us and our subsidiaries, including the Credit Suisse led syndicated secured loan facility, trade payables and lease obligations.

We pay interest on the Convertible Notes semi-annually on May 15 and November 15.

The Convertible Notes are convertible into cash or our common shares, based on an initial conversion rate of 10.4575 common shares per $1,000 principal amount, which represents an initial conversion price of approximately $95.625 per common share.

The initial conversion price is subject to standard anti-dilution provisions designed to maintain the value of the conversion option in the event we take certain actions with respect to our common shares, such as stock splits, reverse stock splits, stock dividends and cash dividends, that affect all of the holders of our common shares equally and that could have a dilutive effect on the value of the conversion rights of the holders of the Convertible Notes or that confer a benefit on our current shareholders not otherwise available to the Convertible Notes.

On conversion, holders will receive cash, common shares or a combination thereof, at our option.

The Convertible Notes are redeemable at our option if our share price has been at least 125% ($119.53 per share) of the conversion price for at least 15 trading days during any 20 consecutive trading day period.

On a fundamental change, which would include a change of control, holders may require us to repurchase their Convertible Notes for cash at a purchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest."

[Palm]

If the pps stays within the $45-$60 range until Nov 10, IOC will have little choice to pay the combo of stock + cash; exactly as these holders desire. MS and Macquerie were the leads on this and it would be good for those they sold the notes to to get the shares/$1,000 and the difference in cash. Assuming pps goes up after Nov 10, they make out nicely. Mgmt has little choice but to do this as they already spent the money on the shares.

[Palm]

Note: per this disclosure this is what we're dealing with.

"During the quarter, we redeemed and terminated 730,000 common shares for a total purchase
price of $41.8 million."

To retire $70 million in Notes this converts to the just over $95/share mentioned in the other disclosure. At $50/share the 730k shares only equate to $36,500,00; a shortfall of $33,500,000. You can do the math on other pps scenarios. I've said before that I suspect this pps shortfall may not be coincidence. The lower pps at payday, the less the shares take care of note principal, and the more cash. Then assuming pps is left to run, those shares become worth much more; nice "bonus" for Note-holders.

Magic

[Stavros]

Perhaps for IOC it will be best to give the holders total cash of $70 million and then enjoy the PPS appreciation themselves?

It depends on the calculation on Monday November 9, 2015.

[Getitrt2]

If I understand the terms correctly, it sounds like to me that IOC has no option to use shares to redeem any of the bonds unless the stock trades at at least $119.53 per share for the required period. I think it's going to have to be a 100% cash redemption, which I do not see as any big deal.

[trans]

If I understand the terms correctly, it sounds like to me that IOC has no option to use shares to redeem any of the bonds unless the stock trades at at least $119.53 per share for the required period. I think it's going to have to be a 100% cash redemption, which I do not see as any big deal.

Agree, imo too much is being made of  this, it is what it is.  They can also float another note say 5 years also for $70 mm and cash the present cv offering out.  Lots of ways to deal with this.  I see a higher price by maturity, perhaps noticeably, but that's my guess.

[TomCrooz]

OK people, convertible bonds are usually issued by smaller companies that have lower credit ratings. Usually these companies would have to pay very high rates of interest because typically their credit rating is below investment grade. To save the company some interest over the life of the bonds, they issue the convertible bond so they can typically lower the interest rate they have to pay and entice people to buy their bonds with the hope that these investors can do better if the stock increases. If the stock does not increase, the company benefits because they paid a lower interest rate over the life of the bond. If the stock increases significantly, the company usually has the ability to call the bonds early. Why on earth would IOC want to pay investors 10 shares of greatly reduced stock and make of the difference of the $1,000 per bond due in cash???? They will pay the entire amount in cash and be very happy that they had a 5 year loan at 2.75%( verses Civelli type rates). If the stock was $125, then INVESTORS would convert to 10 shares, thus costing IOC 2.75% per year in interest plus giving $1,250 worth of stock to investors. I do not believe the stock will be over $100 by November, so the bonds WILL be paid in cash.

[Stavros]

Thanks Tom

[TomCrooz]

PS If IOC did indeed buy back those 810,000 to pay of bond holders, it was because they thought the stock was going to be significantly higher than $100 and thought they would be smart to buy discounted shares to give bondholders when they converted. Stock not over $100....no conversion by bondholders. They want the $1,000 owed to them not $470 that 10 shares are worth now.

[Palm]

Croozer,
After looking at this more I agree that it's most likely that they will pay the balance of $69,998,000 in November to retire the notes. To finish this with a final "beating" we just need to understand that by spending the $42 million or so to buy and retire the 732k shares they in effect locked in the 7.91% bifurcated rate they disclose in the financials. The bond holders will not realize this of course, but IOC will incur the $70 million + $42 million; $112 million plus the 2.75% interest. So in effect IOC decided to be "conservative" and lock up the shares to be ready for conversion, whether initiated by bondholders or IOC (should the pps get to just over $119). Question is was it "wise" to spend the $42 million when they did (the equivalent of their share of 2 wells plus in PRL 15). Hindsight is 20-20 I know, but we have that luxury.

If I were a bondholder I'd be a bit PO'd if in the end I lent this risky company for 5 years and ended up getting my money back, plus a whopping 2.75% interest annually. Will be hard to do anything like this in the future as the IBs and their clients will likely say, "You fooled us once".

Some may say $42 million "isn't that much", and that is for each to decide, but still not sure what they thought was going to propel pps to the levels of the high $90s or to the $119 area given the circumstances of Aug 2014.

It is done.