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.
Related or Semi-related Video
Finance: What is Bankruptcy?260 Views
Finance a la' Shmoop what is bankruptcy well in the old days
this was bankruptcy you'd go to prison if you couldn't pay your bills and [People in prison for bankruptcy]
unfortunately there weren't and still aren't a lot of legal high wage earning
opportunities in prison working your way out of debt on the chain gang wasn't [Prisoners working outside]
really a thing back then so instead the burden would be on your family to pay
back the loan you'd promised to pay back and didn't ugly situation it paved the [Officer knocking on a prisoners family member to pay their debts]
way for some well today bankruptcy has a range of flavors that it comes in but
basically it exists as a legal vehicle to avoid the aforementioned situation a [Bankruptcy van driving]
bankrupt person and/or corporation stands in front of a judge they turn
their pockets inside out with a sad face and the judge then decide who will be [Person opens their pockets inside out in front of a judge]
paid when and how much well how does she decide the order for who gets paid back
when? well, it usually prioritizes employees and vendors owed a paycheck
above banks who have made a loan and under that umbrella all different types
of loans have different priorities if the bankrupt individual owns a home it's [bankrupt individual in his home on the toilet reading a newspaper]
usually sold out from under him and anything left after paying off the
mortgage is used to pay others even if you do survive a bankruptcy your credit
is pretty much ruined who's going to want to loan you money once you've
proven that you're not good with being loaned money yeah if you've defaulted in [a really low credit score chart for a bankrupt individual]
the past on promises to pay people back why wouldn't you do the same thing again
well remember that twenty dollars you loaned your buddy Eric that he never [Person loaning 20 dollars to friend Eric
paid back well how eager are you going to be to hook him up with another twenty
especially since you'd only be feeding his betting on frog fighting habit yeah [Eric betting money on frog fighting]
not so much so long Eric you'll get the help you need!
Up Next
What is a Busted Convertible? A busted convertible is a convertible bond that will never be converted to stock because the underlying stock price i...
What is convertible debt? Convertible debt is a type of bond that’s issued by a corporation. Ownership of these bonds means that the holder has t...
What are Convertible Bonds? Convertible bonds are bonds that have a provision to be converted into equity common shares at a predetermined strike p...