Omnicom Group has issued $750 million of new 30-year convertible loan notes – called “LYONs” – to replace some of its existing longterm borrowings. Ostensibly the new notes will bear no interest and offer no premium on redemption, except in limited circumstances. Instead holders will have the right to convert each $1,000 of loan notes into 9.09 Omnicom shares. But conversion is permissible only when the share price reaches $138 – well above the $89 price when the notes were issued on 8 February – creating a notional premium on the loan note value at conversion which presumably will be offset against the premium on the issue of new shares.
Thus instead of Omnicom paying interest, existing shareholders will suffer some dilution and loss in value if the US accounting authorities allow the treatment. Omnicom’s long-term debt:equity ratio was a heady 1.8:1 at 30 September 2000.