CapitalSource begins exchange offers for 1.25%, 3.5% convertibles

By Angela McDaniels

Seattle, Feb. 13 - CapitalSource Inc. began offers to exchange its outstanding 3.5% senior convertible debentures due 2034 for up to $330 million of new 4% senior subordinated convertible debentures due 2034 and its outstanding 1.25% senior convertible debentures due 2034 for up to $225 million of new 1.625% senior subordinated convertible debentures due 2034.

The offers will expire at 5 p.m. ET on March 15, according to an S-4 filing with the Securities and Exchange Commission.

The new notes will have similar terms to the outstanding notes, except they will rank junior to all of CapitalSource's existing and future debt, will not pay contingent interest and will contain payment-upon-conversion provisions based on a longer observation period and a volume-weighted average stock price.

Noteholders will receive $1,000 of new notes for each $1,000 of old notes exchanged. Interest accrued to the settlement date will be rolled over and will be payable to holders on the next coupon payment date - July 15 for the 4% notes and Sept. 15 for the 1.25% notes - along with regular accrued interest.

The company said it is making the exchange offers as part of its goal to access the unsecured debt markets more regularly to meet its funding objectives.

Because the new notes will rank junior to the company's secured and senior unsecured debt, CapitalSource said it believes the exchange offers may enhance its credit profile for senior debt and may result in higher senior debt ratings, which may in turn enhance the company's access to senior unsecured debt funding.

The exchange offer for the 3.5% notes is not conditioned upon the successful completion of the 1.25% notes and vice versa.

Wells Fargo Bank, NA is the exchange agent for the offers, and Citigroup Global Markets Inc. is the dealer manager for the new notes.

CapitalSource is a financial firm based in Chevy Chase, Md.

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