American Axle says it will deliver accreted principal in cash for conversion of 2% convertible due 2024

By Kenneth Lim

Boston, May 18 - American Axle and Manufacturing Holdings Inc. will deliver in cash at least the accreted principal amount of its 2% convertibles due 2024 to holders who exercise their contingent conversion option, a company representative said on Thursday.

The confirmation comes a day after the company said in a statement that holders of the convertibles "are entitled to convert their Securities in accordance with the terms of the Indenture and paragraph 9 of the Securities providing for conversion upon a credit ratings downgrade."

That indenture was issued in 2004, when American Axle said it chose to exercise its right to "deliver cash in an amount at least equal to the Accreted Principal Amount of the Securities converted" in the event of such a contingent conversion. Credit rating agency Standard and Poor's cut Detroit-based American Axle to below investment grade in two weeks ago, triggering the contingency conversion option.

American Axle has also said that it has enough liquidity to settle the conversions.

The American Axle representative did not know how many investors had applied to convert the notes.

American Axle's 2% convertible due 2024, which was trading at 83 at the start of Tuesday, reached as high as 100.5 on Thursday and ended at about 100.25 against the closing stock price of $16.46. American Axle stock (NYSE: AXL) slid 0.24% or 4 cents.

"That's how crazy it is," a convertible bond trader remarked.

The convertible trader said "I just don't understand why those things are trading."

"Maybe they're expecting the company to do some stock incentive to the holders to not put it back," the trader speculated. But that's a risk, the trader said. "It doesn't make sense to me that you would buy them above par."

The conversion option gives a healthy profit to investors who held the convertible before the price ran up on Tuesday, particularly since the notes had an initial conversion ratio of just 18.0421 shares per note.

The market only started to realize late Tuesday that the notes could be converted for cash worth at least the principal amount. Even then, several analysts and traders were still unaware of the reason for the convertible's rapid rally on Tuesday evening. Michael Knox of Xtract Research, which keeps track of legal documents related to fixed-income securities, speculated on Tuesday that American Axle may have made a mistake when it worded its 2004 cash-settlement notice and created the loophole.

One convertible fund manager said on Tuesday that "whoever discovered this needle-in-a-haystack deserves the quick gain!"

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