Contingency planning

23 May 2003

The German group won t have to account for how its bond could dilute its earnings per share. The bond contains a socalled contingent conversion right. These are common features of US deals but have not been seen in Europe.

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The Siemens convertible bond launched on Thursday contains a contingent conversion feature, which is unprecedented in Europe, according to equity capital markets bankers.

The feature prohibits owners of the bond from converting it into shares unless the stock has been trading at least 10% above the conversion price for at least 20 of the past 30 trading days.

Absent this feature, an investor may elect to convert bonds into shares at the preagreed conversion price regardless of where the stock is trading.

Companies may account for convertibles that contain the feature as straight debt unless their share price has breached the contingent conversion threshold, under US accounting standards. The dilutive impact of the bond may therefore be invisible in fullydiluted earningspershare numbers.

Contingent conversion features are common in US bonds. They are understood to have been used by General Motors, Verizon, Wells Fargo, Merrill Lynch and Yahoo!

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