Cadence Design Systems (CDNS) recently priced an offering of $300 million principal amount of cash convertible senior notes due 2015. The notes were sold to qualified institutional buyers under the SEC Rule 144A. In addition, Cadence granted the buyers the option to purchase up to another $50 million principal amount of the notes to cover overage. Up to press time, that option was not exercised.
The notes will pay interest semi-annually at the rate of 2.625% per year, payable March 1 and December 1, beginning December 1, 2010, and mature on June 1, 2015. Prior to March 15, 2015, the notes will be convertible into cash at the option of the holder under certain conditions. Thereafter, the company may redeem the notes at any time. The notes are initially convertible 132.05205 shares of CDNS common, which is equivalent to $7.55 a share. CDNS closed at $6.16 the day prior to the sale of the debt issue.
At a price of 100.14, with the underlying common at $6.08 a share, the notes commanded a 24% premium over conversion value. Their participation in the activities of the stock is favorably leveraged, while yielding 2.6%. The stock pays no dividend.
Based on our model’s projections, these notes are attractively priced and offer good upside equity participation and solid downside protection. However, since the notes were issued to qualified institutional buyers, liquidity could be sparse until the notes become registered.