Is Drug Firm's Debt Really Better Than T-Bills? - TheStreet

Teva Pharmaceuticals

(TEVA) - Get Report

has proved again and again that while it may not be the same league as

Check Point Software Technologies

(CHKP) - Get Report

, Israel's largest listed company with a value of close to $30 billion, in the generic drugs industry it is in a league of its own. Teva has doubled its value in 12 months to a market cap of $10 billion. Who would have thought it a year ago?

This week, Teva proved that it is unrivalled in the capital markets, too. It carried out a $500 million

convertible debt issue under conditions not seen in the U.S. capital markets for years, certainly not among Israeli companies.

Teva had aimed to raise $300 million. In fact, it raised $500 million, a huge sum by any criterion, and at remarkable terms. The bonds are convertible into Teva common stock at $86.23, a premium of 26% above its Wednesday closing price of $67.43. The conversion price extrapolates to a market cap of $11.6 billion.

At that price one would have thought that Teva would be offering an attractive rate of interest. Far from it -- the bonds carry an annual interest rate of a mere 1.5%. That's low by any standards. For comparison, U.S. Treasury bills yield 6.5%.

Even when Teva announced a month ago that that a consortium of banks would lend it $135 million, the interest rate stood at 7.25% -- almost five times more than the rate it will pay on its bonds.

Teva already has bonds trading on

Nasdaq bearing a fixed rate of 7%, enormously more than the new paper.

The magnitude of Teva's achievement is underscored by comparison with other Israeli companies' bond issues. In the last six months, Israeli firms have raised $2 billion from debt issues on Wall Street. The other companies must be envious of the conditions that Teva has negotiated -- from the point of view of both interest and yield.


Mercury Interactive


. Its market cap is higher than Teva's and it grows faster than drug companies. Three months ago Mercury raised $500 million at 4.75% interest.

On a $500 million issue, the difference between 4.75% and Teva's 1.5% translates into a savings of 3.25%, or $16.25 million in interest payments a year.

To understand what that means, Mercury's profit in its record second quarter was $12 million.

One of the reasons behind Teva's dizzying success is probably the

put option it gave buyers to sell their bonds back to Teva at 103% of the principal. This guarantees them just under another 1% a year. Naturally, the buyers may not take advantage of this option, especially if they convert the bonds into stock, as happened with Mercury, which has already passed the

strike price of its bonds.

The excellent terms Teva achieved may well prevent its stock from diving, which is what usually follows a debt issue. It happens because speculators sell the stock

short and buy the bond, so if the stock goes up, the speculator is covered by the short share and the long bond, plus he gets the guaranteed interest. In Teva's case, because the interest rate is so low and the stock is pretty far from its strike price, pressure should be minor.