Standard Pacific Corp. this morning (Sept. 24) disclosed plans for a complex, $100 million convertible debt offering that will involve elimination of the company's stock dividend as well as a hedge play designed to lessen the dilutive effect of the issuance of new shares should the company decide to pay off the debt in stock. Wall Street voted with its feet, sending Standard Pacific stock (NYSE:SPF) down briefly to its 52-week low. SPF was trading down 13.5% to $7.01 on heavy volume in mid-afternoon trading.

The proposed transaction, which would be used to draw down Standard Pacific's $250-million outstanding debt on its revolver, is a public offering of $100 million in convertible senior subordinated notes due in 2012 that would grant the underwriters an option to purchase up to an additional $15 million aggregate principal amount of notes solely to cover over-allotments. Credit Suisse Securities (USA) LLC, Banc of America Securities LLC and J.P. Morgan Securities Inc. will manage the offering.

The $100 million debt would be convertible into common stock, cash or a combination of stock and cash, at Standard Pacific's option. The terms of the notes will be determined at the time of pricing of the offering. The holders of the notes would be able to require Standard Pacific to repurchase the notes if there are events or transactions that constitute a "fundamental change" in the company.

Standard Pacific plans to enter into convertible note hedge transactions with affiliates of the lenders. "These convertible note hedge transactions are intended to reduce the potential dilution to the holders of the Company's common stock upon conversion of the notes," stated a company press release. "In connection with establishing the initial hedge of the convertible note hedge transactions, the relevant counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the notes. These activities could have the effect of increasing or preventing a decline in the price of our common stock concurrently with or shortly after the pricing of the notes."

Standard Pacific said it intends to use the cash the offering would generate to pay back part of its outstanding debt on its revolving credit facility and to pay the cost of the convertible note hedge transactions.

The hedge play would involve the company lending shares to an affiliate of one of its lenders so that the stock can be shorted and hedge positions taken. As explained in the company statement, "Under the share lending agreement, the share borrower will offer and sell the borrowed shares in a registered public offering and will use the short position resulting from the sale of such shares to facilitate the establishment of hedge positions by investors in the notes to be offered. Such affiliate of Credit Suisse will receive all of the proceeds from the sale of the borrowed shares. The Company will not receive any of the proceeds from such sales, but will receive a nominal lending fee from the share borrower."

The borrowed stock would not be counted as having actually been issued. The company, citing "generally accepted accounting principles," said that it believed that while the borrowed shares would be considered issued and outstanding for corporate law purposes, the borrowed shares would not be considered outstanding for the purpose of computing and reporting earnings-per-share because the shares would have to be returned to the Company by October 1, 2012.

Michael Rehaut, the lead home building analyst at J.P. Morgan Securities, in a research note viewed the drawdown of the revolver via longer-term debt as a positive, but he noted that the dilutive effect of new stock that the company could issue to retire the debt could be negated by a rising share price. Rehaut also noted that the need for the company to lend shares was due to the scarcity of shares in the open market due to the large number of short positions that are held against the company.