CapitalSource holders exchange 97% of 3.5% convertibles, 79% of 1.25% convertibles

By Angela McDaniels

Seattle, April 4 - CapitalSource Inc. said holders of about 90% of its outstanding senior convertible debentures tendered their notes in exchange for new senior subordinated convertible debentures during an exchange offer that expired on March 30.

Under the offer, which began on Feb. 13, noteholders could exchange outstanding 3.5% senior convertible debentures due 2034 for up to $330 million of new 4% senior subordinated convertible debentures due 2034 and outstanding 1.25% senior convertible debentures due 2034 for up to $225 million of new 1.625% senior subordinated convertible debentures due 2034.

In total, CapitalSource issued $321.554 million new 4% convertibles and $177.38 million of new 1.625% convertibles in exchange for like amounts of the 3.5% convertibles and 1.25% convertibles, respectively.

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

Noteholders received $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.

Following the exchange, $8.446 million of the 3.5% convertibles and $47.62 million of the 1.25% convertibles remains outstanding.

Previously, the company said it was making the exchange offer as part of its goal to access the unsecured debt markets more regularly to meet its funding objectives.

Because the new notes rank junior to the company's secured and senior unsecured debt, CapitalSource said it believes the exchange offer 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 change of almost $500 million of senior debt to senior subordinated status further strengthens our balance sheet and adds to the financial flexibility of the company," Thomas A. Fink, CapitalSource's chief financial officer, said in a company news release.

Wells Fargo Bank, NA (215 861-9406) was the exchange agent for the offer, Georgeson Inc. (212 440-9800 for banks and brokers or 888 293-6906) was the information agent, and Citigroup Global Markets Inc. (212 723-7372 or 800 655-7450) was the dealer manager for the new notes.

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

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