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Here We Go Again



Triarc (TRY), a restaurant franchiser, announced this morning that they are instituting a regular quarterly dividend of around 3%. The company just issued $175 million in convertible bonds through Morgan Stanley in May of this year. The company is apparantly using the proceeds of the issue to pay $18 million per year in dividends since they are losing money in their business. As I have described in the past, a convertible bond holder is negatively affected by unexpected dividends unless the covenants provide for protection, which most of the newly issued bonds do.

So it seems that an unintended consequence of the new dividend tax treatment is for companies to actually go out and borrow money to pay their shareholders (and themselves) dividends. This is all done at the expense of debt holders (more debt leaves them more exposed) and especially the convertible bond holders: with the announcement the convertible bonds went from $108 to $96 representing a $19.4 million loss in value.

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