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Much has been written lately on the high yields on convertible Gilat Satellite Networks (Nasdaq:GILTF) (GILTF) bonds, an annual 56%. Gilat, as you may already know, has a problem in the form of $350 million in bonds issued in the end of February 2000, the height of the hi-tech fever days.

The rapid deterioration of its financial state, the heavy losses and its high burn rate force Gilat head honchos to come up with a creative solution to help the company remove the threat to its very existence.

One such solution is indeed emerging. TheMarker has learned Gilat is considering making a offer to buy back the bonds currently circulating. The bond, currently selling for 25 cents, will be purchased for 33 cents, a 33% premium over its current market price.

In addition to the premium on the market price, Gilat will exchange old bonds for new ones that will carry similar interest to the original interest on the bond, issued in February of 2000. The original bonds are redeemable in 2005, but the new bonds will be redeemable only in 2010, five years later.

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Another incentive Gilat plans to provide the bond holders is a dramatic reduction of the conversion ratio between the bonds and the company shares. The ratio today is 180 bonds per share, and is only worthwhile if the share reaches $180 or more.

Gilat currently trades at $5.75, having lost 96% since its peak in early 2000. This actually takes the conversion option out of the game, since there is hardly any chance of the shares going back to $180 levels in the foreseeable future.

Gilat is therefore planning to reduce the conversion ratio to $8 to $18, which, though higher than the share's current price on the Nasdaq, is definitely a range the shares can reach in the course of the next few years. The planned move will reduce Gilat's debt by about $160 million. Once the transaction is completed, Gilat will repay 70% of the original sum raised.

Gilat Satellite, valued at $125 million, ended the first nine months of 2001 with a massive $340 million loss, resulting mainly from major inventory and investment write-offs.