Omnicom sold $550 million worth of 30-year, zero-coupon, zero-yield convertible bonds in the private-placement market last week.
The bonds are unregistered and not meant for sale to the public but, rather, to institutions. However, they can be registered in the future for sale to individual investors.
Omnicom said in a statement that the proceeds will be used to repay debt and for corporate purposes.
Convertible bonds can be converted into stock under certain conditions. Alexia Quadrani, a Bear Stearns analyst, said the conversion could be profitable for bond holders if Omnicom's stock trades above $103, a 43.6 percent premium over Monday's closing price of $71.75 on the New York Stock Exchange.
The issue is part of a recent wave of convertible bonds called "no-nos." They have no coupon, meaning they do not pay interest, nor are they issued at a discount from their redemption value. Bond investors typically seek interest payments or the gains achieved as a bond, sold at a discount, closes in on its redemption value. The appeal to investors is that no-nos are profitable if the stock goes up, but the investment is protected if the stock does not do well.
Even if Omnicom's share price does not go above $103 during the bonds' 30-year life, investors will get back their $1,000 investment per bond in 2033. In contrast, stock options become valueless on their expiration date.
Unlike Omnicom's two existing series of convertible notes, which can be "put" back to the company each year, the new issue has staggered put dates (when the bondholder may compel Omnicom to buy back the debt). The first put date does not occur until 2006 and is followed by 2008, 2010, 2013, 2018 and 2023.
Fitch Ratings rated the new notes A-, with a ratings outlook of "stable." —NO'L