Sideswiped by Convertibles

Hybrid bonds once seemed almost like free money to the companies that issued them. Now they're haunting many highfliers

For companies in search of cheap financing during the end of the '90s boom, convertible bonds seemed the closest thing to free money. These hybrid securities -- in which bonds eventually can be converted into equity if a share-price target is hit -- gave telecom and energy companies such as Lucent Technologies (LU ) and Calpine (CPN ) the best of all possible worlds. By issuing bonds that featured a large balloon payment of debt and accrued interest years later, companies still enjoyed huge tax breaks.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.