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Encore Capital Group Inc. (ECPG - Snapshot Report) announced the pricing of its $100 million convertible senior notes due 2017 at 3% per annum. The interest, however, will be paid semi-annually on May 27 and November 27 each year.

Encore Capital had announced the private offer for these senior convertible notes earlier this week. The offer is expected to end on November 27, 2012, subject to the fulfillment of certain closing conditions.

The notes will be sold only to qualified institutional buyers as defined by the amended Rule 144A under the Securities Act of 1933. Moreover, the initial buyers have the option of buying additional notes worth $15 million.

The senior notes are unsecured and can be converted into cash or equity shares, depending on the fulfillment of certain conditions and occurrence of events. The conversion price is based on the volume-weighted average price of the shares, which is calculated using the daily share prices over an observation period.

Initially, the holders of the notes will receive 31.6832 shares for every $1,000 principal value held by them. This conversion rate translates into a conversion price of about $31.56 per share, representing a premium of around 25% on the closing price of $25.25 of Encore Capital’s shares on November 20, 2012.

Encore Capital also undertook some hedge and warrant transactions related to the notes with certain financial institutions. Moreover, in the event of additional purchase by the initial buyers, the company will take on additional hedge and warrant transactions.

Encore Capital expects to raise $96.5 million as net proceeds from the offer. About $10 million from the proceeds are projected to be used to cover the costs of some hedging transactions, while another $25 million will be set aside for repurchasing the converted shares from the buyers of these notes.

An additional amount of $61.5 million will be used to repay debt taken under the revolving credit facility. Any residual amount will be used for general corporate expenses. Further, the proceeds from any additional purchase by initial buyers will be used to pay the expenses related to additional hedge transactions and for corporate purposes.

The senior notes will increase Encore Capital’s debt-equity ratio to 1.66 from 1.43 as of September 30, 2012. Moreover, additional purchase by the initial buyers will raise the debt-equity ratio of the company to 1.69. This compares unfavorably with the substantially lower debt-equity ratio of 0.37 of peer Portfolio Recovery Associates Inc. (PRAA - Analyst Report) as of September 30, 2012.

Encore Capital currently carries a Zacks #3 Rank (short-term Hold). We maintain a long-term ‘Neutral’ recommendation on the stock.

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