Scottish Re convertible put date may be in 2007, not 2006, based on indenture, says Xtract Research

By Kenneth Lim

Boston, Aug. 7 - The put for Scottish Re Group Ltd.'s 4.5% convertible may be in 2007 instead of the widely used 2006 date based on the security's indenture, said Xtract Research, a provider of information and database services related to financial documents.

"The indenture says the first put date is Dec. 6, 2007 and the prospectus and annual report both say it is Dec. 6, 2006," Xtract Research managing partner Manish Aggarwal wrote in an e-mail. "It is our view that since the indenture is the governing document, the December '07 put date is the date the company would have to honor especially if it is in the interest of bond holders."

The 4.5% convertible, which is due in 2022, entered the spotlight recently after Scottish Re's profit warning and the resignation of its chief executive officer fueled concerns about the company's liquidity.

"They looked like they have enough cash, but then the CEO resigned, so people were wondering...and rumor begets rumor," a sellside analyst said, adding that the convertible initially fell but bounced back after the company assured investors that it has no near-term liquidity issues.

Scottish Re has repeatedly said that it is confident of meeting its obligations if the $115 million outstanding of convertibles are put in December 2006.

But while Scottish Re has consistently said that the put is in 2006 - in the convertible's prospectus, its annual report, press releases and conference calls - the 2007 may be the legally correct year based on the indenture.

An amendment to the indenture in October 2004 deleted Scottish Re's option to repurchase put convertibles using shares and required the company to buy back the notes with cash - another recent source of confusion - but did not change the 2007 date, Aggarwal noted.

"The problem is no one looks at the indenture," Aggarwal said, adding that he has left messages with Scottish Re seeking clarification but has not received a response.

Scottish Re representatives could not be reached for comment for this article.

A sellside convertible bond analyst said that if the put date was pushed out a year, the paper's theoretical value could fall by around 1.5 points - to just above 97. Scottish Re's 4.5% convertible was marked at 96.625 against a stock price of $7.75 on Monday.

A buyside convertible bond trader agreed that a later put would reduce the value of the convertible.

"It'd be lower, that's for sure," the trader said.

But a Connecticut-based convertible bond analyst thought that the 2007 put would probably be changed, partly because all signs point to a mistake in the indenture.

"To me it looks like it's an error because the company has been saying '06 and the prospectus says '06," the analyst said. "It looks like it's just an oversight."

If the company insists that the put is in 2007 despite what it has been saying all along, it may have to offer a sweetener to appease bond holders, the analyst said. But simply telling investors that they have to wait another year is likely to incur the wrath of noteholders.

"There's a real question of good faith here, because the company after telling everybody that it's an '06 deal, and then if they went back on that, they'd probably be done with the debt market for some time," the analyst said.

"The person who told you that the indenture is the governing document is correct, but it would be difficult to hold investors to that, because nobody has the indenture in their hands when the deal is marketed," the analyst added. "It's significant because it has to be addressed, but I'm pretty confident that the outcome will be that they'll be putable in '06. But they really should amend the indenture."

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