Yesterday after the close of the markets, Cogent filed an 8-K with the SEC . Now sometimes when filings come out late on a friday they’re bad news, but not this time. Alongside an update on their stock buyback program, the company repurchased $20M face value of its 1% convertible notes for $9.9M. That’s under 50 cents on the dollar. I haven’t seen anyone in this sector buy its debt back for such a price since the height of the telecom nuclear winter.
Now, Cogent may be facing pricing pressure and a weakening economy, but they certainly aren’t distressed. In fact they just issued $200M of this debt 15 months ago at the very end of the party in the debt markets at a time when they really didn’t need so much. But their stock was in the stratosphere and the money was available, so they took it. And now just over a year later, it is blatantly obvious that they were right to do so and those who bought these 1% converts weren’t thinking too straight. So Cogent is opportunistically buying it back while Wall Street holds a garage sale, pocketing the difference. So much so that they will likely book an actual GAAP profit this quarter – albeit a one time one.
They took the bond guys for a ride on this one. It’s almost as if the investment bankers lost their sense of value and risk back then. But then, that much is already obvious by now as the financial markets have imploded lately. For Cogent we could think of their debt play as a successful hedge against a weakening economy – yes growth suffers, but the balance sheet doesn’t…
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Categories: Financials · Internet Backbones
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Rob,
You didn’t mention that Schaefer personally acquired $3 million face amount for $1.38 million at the same time. They seem a good buy even if you figure the conversion feature has no value– since the holders can put the securities back to the company beginning 6/2014, at that price (49.5%) they are yielding 14% p.a. to the ’14 put. The other fact about this convert that is not well understood is that the conversion price adjusts should the company be sold at below the nominal conversion price– so in addition to a straight bond yield of 14% the conversion feature continues to have real option value.
”’the company repurchased $20M face value of its 1% convertible notes for $9.9M. That’s under 50 cents on the dollar.”’
what was the year of that 1% convertible ? if I owned that debt, I may have donated it to a local charity for the writeoff