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Investors in Gilat bonds fret over further falls in share price

After its share slide, Gilat may find itself forced to redeem all its bonds in full, come due-day

The acute warning Gilat Satellite Networks (Nasdaq:GILTF) issued last night turns the spotlight on its Nasdaq-traded bonds, and has investors a-jitter.

Gilat bonds, it transpires, can yield a phenomenal 34% return on investment. Buy thrm today and wait five years for their due date in 2005: You stand to get a 34% yield on the initial investment, five times the norm.

If, that is, Gilat can make good its debt to bond-holders.

At the end of February Gilat raised $350 million from convertible notes. But its shares dived, making conversion to stock an unattractive option.

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In other words, unless Gilat's business picks up significantly, the company may have to prepare for the possibility of having to redeem its bonds, 4.25% coupon included, in full.

That may not be so easy. Gilat's cash balance on the last day of the second quarter was $96.8 million. In the first six months of fiscal 2001 Gilat burnt up an estimated $130 million, from cash reserves at the end of December of $226 million.

There is relatively little trade in Gilat's convertible notes, hence relatively small transactions could dramatically shift yields.

Yesterday Gilat warned that it will lose $247 million for the third quarter, on revenues of $80 million, down from $118 million revenues for Q2.