Tyco International Ltd, Vivendi Universal SA and more than 50 other companies around the world may have at least US$60 billion in unexpected cash payments due by the end of next year.
That's the amount of convertible bonds they may be forced to redeem because tumbling share prices eliminated investors' incentive to exchange the debt for stock. Tyco investors can force the company to pay them US$2.3 billion in February because its bonds can be converted into stock at or above US$87.92. The shares closed US$0.04 higher at US$13.30 on the New York Stock Exchange.
"For any company in this situation the fact that markets are going down is not good news," said Pierre Sellier, treasurer of Lagardere SCA, France's second-largest media company, which may have to repay 768 million euros (US$748 million) of convertible bonds in December 2003.
Last year companies sold a record US$160 billion of the securities, up from US$106 billion in 2000, according to Deutsche Bank AG. Companies often pay less than half the interest required on regular bonds and don't have to repay the cash at all because convertible bonds can be exchanged for their stock if the price rises above a preset amount.
The problem facing a growing number of companies is the shares linked to almost half of the securities in the US$440 billion global market are trading below the price at which they can be converted, according to Robert Barron, an analyst at Deutsche Bank in New York.
"Companies thought they were financing themselves with equity by selling convertibles," said Beat Thoma, who helps oversee about US$600 million of convertible bonds at Fisch Asset Management in Zurich. "Now it's turned into straight debt."
Companies are increasingly amassing debt. As of March, UScorporations owed US$4.9 trillion, up from US$3.4 trillion in 1997, said John Puchalla, an economist at Moody's Investors Service.
Debt exceeded their cash flow by 5.9 times from 4.4 times five years ago.
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