Convertible Bond Arbitrage

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]