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Finance: What is Busted Convertible? 14 Views


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Description:

What is a Busted Convertible? A busted convertible is a convertible bond that will never be converted to stock because the underlying stock price is so much lower than the conversion price, so it is cleverly referred to as busted.

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Transcript

00:00

Finance a la shmoop..what is a busted convertible?

00:06

well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]

00:12

could sever their heads freeze them and in 40 years they would have technology

00:16

to have them reborn into a really cool robot body and yeah kim kardashian model

00:22

was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred

00:27

dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]

00:32

America and Africa but they didn't want to suffer dilution by just selling

00:36

equity or part ownership in themselves to the street at least not at the

00:41

hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]

00:44

to fund these new offices because well they thought their stock would easily

00:48

get to $250 a share in the next few years

00:52

tons of people out there who wanted to you know live forever

00:55

you know like fame.....nevermind their bankers were nervous about how

01:00

investors would react to just a straight bond which carried 8% interest so

01:05

instead they kind of compromised by doing a convertible preferred stock [Men give handshake]

01:10

offering they sold preferred stock to the street that carried just 3% interest

01:15

but those preferred shares were convertible into common stock at a

01:19

hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]

01:23

clipping their three percent coupons until one day the stock hit a hundred

01:27

seventy five bucks or better well and then they could participate in the

01:31

[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop

01:36

video....Test came back from the early decapitating trials and well they were

01:40

oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]

01:45

just didn't want to go there they'd rather truly rest in peace so the stock

01:49

cratered down to $20 a share where it would sit for all eternity in what is

01:54

called a busted convertible and took us a while to get there but we got

01:58

there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]

02:03

had and a convertible stock is so far below the conversion price of $175 well,

02:09

investors assume it will never convert the investment case views

02:13

the convert solely as a preferred or kind of like a bond offering against

02:17

competitive bond interest rates so yeah that's a busted convertible although so

02:23

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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