Nokia To Issue Convertible Bonds - Does It Matter?

Oct.23.12 | About: Nokia Corporation (NOK)

As many, I too was surprised by Nokia's decision to raise 750 million euros ($972 million) from the sale of convertible bonds. The bonds may be converted into a maximum 287.2 million shares, or 7.74 percent of current shares.

As per the company's release:

Nokia (NYSE:NOK) today completed an offering of EUR 750 million of senior unsecured convertible bonds due 2017 convertible into ordinary shares of Nokia Corporation. Nokia intends to use the net proceeds of the offering to prudently manage its capital structure, proactively address upcoming maturities while preserving existing pools of liquidity and for general corporate purposes.

The bonds will carry a coupon of 5.00 % per annum payable semi-annually in arrears commencing on April 26, 2013. The initial conversion price has been set at EUR 2.6116, representing a 28 % conversion premium to the volume weighted average price of Nokia shares on NASDAQ OMX Helsinki between launch and pricing of the offering. The bonds are issued at par and will be redeemed at par on maturity on October 26, 2017, unless otherwise redeemed, purchased, converted or cancelled in accordance with the terms and conditions of the bonds.

The maximum number of shares (assuming no adjustments having been made to the conversion price) which may be issued by Nokia upon conversion of the bonds is approximately 287.2 million shares, representing approximately 7.74 % of Nokia's currently issued shares (excluding the shares owned by Nokia and its subsidiary companies). The terms and conditions of the bonds provide for adjustments of the conversion price for any dividends in cash or in kind as well as customary anti-dilution adjustments. The right to convert the bonds into shares commences on December 6, 2012 and ends on October 18, 2017.

The stock was 5% down on the news, but this is normal, sine the market adjusts for any dilution in real time. The choice for convertible bonds primarily has to do with the fact that convertible bonds carry a much lower coupon. That's important in Nokia's case which has a junk rating.

Whether this action is justified on a balance sheet basis is a close call. According to the company's latest balance sheet, Nokia had 3.56 billion euros in cash and 8.77 in total liquid assets, so liquidity issues are not currently a primary concern. However, taking balance sheet insurance never really hurts, especially when the company is in the middle of releasing its new line of Lumia phones.

Today the company also announced that its Lumia 510 phone is planned for shipping, beginning November 2012 in India, China, Asia-Pacific and countries in South America.

The Lumia 510 will not run Windows 8 but on an updated version of Windows 7.5 and is considered to be an update to the Lumia 610. It is estimated to sell for about $199.

This is a good move, for Nokia has few chances of selling many advanced phones in these regions, because purchasing power in these regions does not favor many Lumia 920 and 820 sales.

The bottom line is, a 7.74% dilution is not a good thing and I personally don't like to see any dilution whatsoever in any stock … stock options included.

However, if the company's new line of phones is even a partial success, it will not mean much for current stockholders at current levels. And in these uncertain times, it never hurts to be cautions and take out an insurance policy.

So assuming the company thinks it needs the money to successfully execute its sales strategy and assuming that the new Lumia phone sales go well, the dilution is a small price to pay for the extra insurance.

Also note, a 5% down day for stock means it actually went up, when taking into consideration the dilution and the current market pressure today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.