Service Corp. to pay accrued final coupon to 6.75% convertible holders

Nashville, May 13 - Service Corp. International said late Thursday that it will pay the accrued portion of the final coupon when it calls its $312.7 million outstanding of its 6.75% convertible subordinated notes due 2008 on June 22.

While the call was no surprise, there had been uncertainty in the market whether the last coupon payment - due June 22 - would be paid or not.

The Houston-based funeral and cemetery company had disclosed the intended call in March but there was confusion regarding a so-called "screw" clause on the issue.

"Holders may get 'screwed' out of the last coupon payment, in other words," said a convertible trader on the buyside.

But late in the day Thursday, Service Corp. made an additional announcement saying that holders of record as of June 7 will receive a cash payment representing interest up to but not including the date of redemption, June 22.

Holders who convert before June 7 will not receive the accrued interest.

The issue will be redeemed at 103.86 plus the accrued interest.

The issue was quoted at the close Thursday at 107.

The conversion price on the issue is $6.92, and Service Corp. shares closed Thursday at $7.24. Called at 103.86, however, the effective strike price is $7.185, a market source said. If the company had not paid the accrued portion of the last coupon payment the effective strike would be $7.42.

Speaking ahead of the clarification from the company, Merrill Lynch convertible analyst Tatyana Hube said the prospectus and indenture indicated that holders of the 6.75% convertibles will give up the last interest payment - $33.75 - upon forced conversion, if the conversion rights expire prior to the opening of business on the redemption date of June 22.

Neither prospectus nor indenture state when the conversion rights expire in the event of an issuer call, she said.

"Given that the conversion rights description in both the prospectus and indenture is incomplete...the language leaves ample room for the company to decide either way," Hube said.

In March, Service Corp. said it was considering a debt financing that would, among other things, be used to finance the redemption of the 6.75% convertibles. In April, the company sold $250 million of junk bonds and used those proceeds to redeem $200 million principal amount of its 6% notes due 2005.

The company said Thursday it expects to fund the 6.75% convertible redemption with cash on hand, estimating $335 million will be used including interest, if all of the notes are redeemed. As a result, the company anticipates recording a second quarter pretax loss on the early extinguishment of debt of $18 million to $20 million.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.