QBE's Happy Meal drags down shares

QBE fell 17c to $7.40 as it revealed the private placement of $US150 million ($275 million) Liquid Yield Options or LYONs. LYONs are a 20-year debt instrument, with the capacity to convert the instruments to equity or cash to share in future rises in QBE's share price, but in most cases they are not converted.

The flexibility of the instrument, with its equity option, has seen LYONs nicknamed the ``Happy Meal" of corporate finance, proving attractive in volatile equity markets.

QBE's chief financial officer, Neil Drabsch, said the instruments represented a win-win because in the event the LYONs did convert, ordinary shareholders would have seen the share appreciate considerably.

The securities will help reduce QBE's annual cost of interest on total debt from 5.2 per cent to 4.8 per cent, according to the company, as there is no general requirement to pay interest during the term of the securities.

Mr Drabsch said QBE's solvency, measured as net assets as a percentage of net earned premium, was 45 per cent, which included a post-September 11 conservative buffer, and would be boosted further by the issue.

QBE would have to take an even more conservative attitude were it primarily a reinsurer rather than a direct insurer, because reinsurers generally have higher exposures to single events and more volatile profits.

While QBE has ruled out further ordinary capital raisings, Mr Drabsch did not rule out that QBE would underwrite the dividend reinvestment plan for its 16c interim dividend, as it did alongside the previous payout. But this was for the board to decide. This would enable QBE to retain the cash paid to investors via an equity issue, but raise only a relatively modest amount of $30 million to $40 million on top of the typically high level of participation in the DRP.

Mr Drabsch also predicted that September 11 would diminish as a matter of discussion in relation to QBE.