I have been looking at the 10Q report for the company. I have been unable to find out the conversion price for the notes. If those whom have access to the annual report were to post it I would be very appreciated.
Since the company bought back some of the notes last quarter at a profit, I assume the conversion price must be either in the high 30s or 40s, otherwise the notes would not be traded at at discount to par. In that case the arbitrageur will not hold, either they have to cover their short when the notes mature next year, or the share price rises to the conversion price so they can convert.
it will be interesting on Tuesday to see if the company bought back any additional notes at a profit.
I believe they were $40. I remember they came up in the last conference call, and the CFO said something like ".. and if the stock isn't above the conversion price of $40 we can still pay off the notes when they come due from cash and other credit lines."
The point was that they have a plan for the notes even if the stock doesn't go to $40.
On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. The convertible notes bear interest at 5 1/2% per annum, payable semiannually on June 15 and December 15 of each year. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the Notes). The convertible notes are redeemable at the option of Sunrise commencing June 15, 2000, at specified premiums. The holders of the convertible notes may require Sunrise to repurchase the convertible notes upon a change of control of Sunrise.
From the company's 05/15/2001 10-Q filing:
On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. The convertible notes bear interest at 5 1/2% per annum, payable semiannually on June 15 and December 15 of each year. On January 26, 2001, Sunrise repurchased $5.5 million face value of the convertible notes, resulting in an extraordinary gain, after tax, of $315,000.
Assuming no additional repurchases, there are $150.0 - $5.5 = $144.5 million in bonds outstanding. At a conversion of 26.89 shares per $1,000 principal, once the stock price exceeds $37.1875, the bonds could be exercised into a total 3.885 million shares. If the holders of the convertible notes were hedging their position by shorting SRZ stock, this would explain a large part of the reported short interest.
A few aspects of these convertibles should be noted: 1) Until the notes mature, the conversion price of $37.1875 can be expected to be a ceiling on the stock price as note holders exercise their conversion right and sell. 2) This "backstop" will give shorts a risk/return advantage and embolden more shorting than would be indicated by hedging activity. 3) The notes mature June 2002, so unless more convertibles are issued, this situation should resolve itself within a year.