Sounds like a lesser-known, depressing Beach Boys song. All about how you were going to the beach and your car broke down..."Now, you're waiting for Triple A-A-A-A-AAAAAA."
In financial terms, the convertible here isn't a roofless car. It's a type of security. Specifically, it's a bond that can get turned into stock under certain conditions.
Usually, the owner of the bond has the option to turn the bond into a certain number of shares at a certain price. That price is known as the "conversion price." If the market value of the company's stock is well below the conversion price...that's a busted convertible.
So Beach Drive Inc. offers a convertible bond with the option to turn into stock at $25 per share. Right now, Beach Drive is trading at $5 per share. No one is going to do any converting for the foreseeable future. Busted convertible. "Now, you're waiting for Triple A-A-A-A-AAAAAA."
Thing is, a convertible bond should trade at a premium over normal debt for that company (assuming similar maturity and interest rates). After all, you have the same payout as the regular bond, but you also have the added option to take advantage of a high stock price, if the shares rise above the conversion price.
But in a busted convertible, that potential benefit is so far over the horizon that it doesn't impact the price. The convertible bond trades at the same price (or essentially the same price) as normal, run-of-the-mill bonds.
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Finance: What is Busted Convertible?14 Views
Finance a la shmoop..what is a busted convertible?
well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]
could sever their heads freeze them and in 40 years they would have technology
to have them reborn into a really cool robot body and yeah kim kardashian model
was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred
dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]
America and Africa but they didn't want to suffer dilution by just selling
equity or part ownership in themselves to the street at least not at the
hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]
to fund these new offices because well they thought their stock would easily
get to $250 a share in the next few years
tons of people out there who wanted to you know live forever
you know like fame.....nevermind their bankers were nervous about how
investors would react to just a straight bond which carried 8% interest so
instead they kind of compromised by doing a convertible preferred stock [Men give handshake]
offering they sold preferred stock to the street that carried just 3% interest
but those preferred shares were convertible into common stock at a
hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]
clipping their three percent coupons until one day the stock hit a hundred
seventy five bucks or better well and then they could participate in the
[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop
video....Test came back from the early decapitating trials and well they were
oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]
just didn't want to go there they'd rather truly rest in peace so the stock
cratered down to $20 a share where it would sit for all eternity in what is
called a busted convertible and took us a while to get there but we got
there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]
had and a convertible stock is so far below the conversion price of $175 well,
investors assume it will never convert the investment case views
the convert solely as a preferred or kind of like a bond offering against
competitive bond interest rates so yeah that's a busted convertible although so
is this they really never should have given robot Kim K a driver's license [Robot Kim Kardashian beside an upside down, crashed car]
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