Omnicom Sweetens Convertible Bonds

Most of the investors holding Omnicom’s zero-coupon convertible bonds, due 2031, elected last week to accept a $30 per $1,000 bond inducement not to sell back the $850 million of notes to the company at this time. (This right was provided to investors when the bonds were issued in 2001.) Omnicom offered to pay the “sweetener” to holders retaining the bonds beyond the “put” deadline of Feb. 4.

This was the second chance for investors to compel Omnicom to redeem the bonds at face value. Only $3.2 million worth of bonds were surrendered for redemption; the balance remains outstanding. The put feature allows holders to sell the bonds back to Omnicom at their $1,000 face value once per year.

A convertible bond, in common with a “straight” bond, is a debt instrument that offers investors a fixed rate of return during its life. But investors can also use convertible bonds as currency to buy a specified number of the issuer’s shares, which is often a profitable alternative if the shares’ market price has risen above the bonds’ conversion value. If such bonds are ultimately converted into stock, the issuer will not have to redeem them.

In many cases, the conversion feature can make it cheaper for issuers such as Omnicom to borrow than if the company used straight debt. It’s also beneficial because the conversion price of the bonds is set substantially above the share price at issue, and so convertible bonds offer a way of effectively issuing equity at a premium. Convertibles can also carry put features and other provisions designed to protect investors in cases where the underlying stock does not exceed the conversion value.

On July 31, Omnicom faces another put option on $900 million of another zero-coupon issue, maturing in 2032.

Convertibles are a popular financing alternative for many, since they offer some reward potential along with price protection. Companies such as Omnicom, IPG and WPP often find convertibles an attractive technique to bolster their financial strength. —NOREEN O’LEARY