New OCEANS convertible structure for AmerUs deal like tax-deductible equity

By Ronda Fears

Nashville, Tenn., Feb. 21 - The new structure for the AmerUs Group Inc. convertible, dubbed OCEANS (optionally convertible equity-linked accreting notes), is essentially tax-deductible equity and the $150 million test case is expected to have huge potential to draw issuers as well as more equity players to the convertible market, said Jeffrey Siedel, head of convertible research at Credit Suisse First Boston. The firm is lead manager of the deal and created the new structure.

"It's got a lot of potential. It's a litmus test. It's big enough, but it's obviously not a major blue-chip name. If it does fly, though, it's going to be very popular with companies," Siedel said.

"It's going to cross borders" among investors, Siedel added. "From a trading standpoint, it's very close to stock, so you want to bring in your equity accounts. We would like to see a big equity play on this. Not that an arb can't set this up, but the hedge funds are going to be concerned about what happens if the stock borrow goes away. For outrights, you've got to like the stock story."

The 30-year convertible senior subordinated notes will price at par of 100 and have a premium redemption price of 127, so the 2% cash coupon will be supplemented by accreted interest for a yield to maturity of 2.6%. Also, there will be a complete pass through of the stock dividend to convertible holders, Siedel said.

The conversion features are designed to discourage conversion in the first five years. The conversion ratio will also accrete from a fraction initially through year five to a ratio of 1.0, moving the initial 0% conversion premium to 10%, he explained. There also is a make-whole feature for the first five years whereby if the issue is called early investors would get in cash what they would lose in stock, he said. There will be a provisional call with a 140% hurdle, and a contingent conversion hurdle of 140%.

A huge participation in the deal by hedge funds is not anticipated, Siedel said. The most obvious target, he said, is equity investors but that involves a fair amount of education.

The Rule 144A deal is not expected to price until Feb. 28 after a full road show, due to the complexity of the new structure. There also is a $35 million greenshoe available.

Des Moines, Iowa-based AmerUs, a life insurance an annuity firm, plans to use proceeds to repay about $100 million of its bank revolver and to buy back stock.

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