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Convertible Notes for Dummies

Discussion in 'TSLA Investor Discussions' started by rdalcanto, Feb 26, 2014.

  1. rdalcanto

    rdalcanto Member

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    Can someone please explain to a non-financial guy what the convertible offering means? Can a regular person get in on it with say $50,000? How does the rate of return work? Is it a safe investment? I don't get any of it.... Thanks.... :redface:
     
  2. pete8314

    pete8314 Vendor

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    +1! I read it twice, understood less the second time around!
     
  3. 772

    772 Member

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    Here's a basic explanation of how a convertible security works: Convertible Security Definition | Investopedia

    The specific terms and availability of this offering are not yet released, as far as I can tell.

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    Oh, here is a way you could find more details if you're really interested... contact these underwriters for a prospectus:

    Tesla Announces $1.6 Billion Convertible Notes Offering | Press Releases | Tesla Motors
     
  4. Clprenz

    Clprenz Member

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    So how does one go buy this bond? Cannot seem to buy any Tesla bonds on Etrade (Last year?), are they a one time thing?
     
  5. dauger

    dauger Member

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    As an investor, is there an advantage to buying convertible bonds compared to other investment methods?

    I'm already long TSLA starting at 35/sh (woohoo!) but I can't fathom buying at 250 today so I'd like to know if this is a viable way in presuming long-term confidence in the company.
     
  6. 772

    772 Member

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    I sent an e-mail to [email protected] and they replied that the prospectus is not available yet for this offering, but they will send it to me once they have it.

    Has anyone gotten a prospectus from the other investment banks?
     
  7. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Active Member

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    Basically:
    - borrower pays a lower interest rate: downside is reduced interest payments
    - bondholder gets stock options: upside is potential share profits

    So, the question for the investor is, are the reduced interest payments worth the potential upside from the ability to buy take profits on a rapid increase in the share price (or even just to get access to equity that you wouldn't otherwise have)?
     
  8. kenliles

    kenliles Active Member

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    How is the stock price set for conversion? Would that be in the prospectus?
     
  9. 772

    772 Member

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    yes, that's why I'm trying to get a copy. The pricing of the notes themselves will depend on investor demand.
     
  10. kenliles

    kenliles Active Member

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    + 1 - thanks 772
     
  11. Familial Rhino

    Familial Rhino Endangerous Herbivore

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    First off, as a long-time lurker who benefitted extensively from the top-notch contributions of the many smart people on this board, I want start with a Big Thank You to all. I bought my first TSLA shares on 28 Sep 2010, one day after I read this Wired article, and I remain heavily invested in it today (on the long side, obviously.)

    With that said, on to my question:

    How is this equation affected by the fact that, in this deal, converting to shares is at Tesla's discretion? That is, why do the lenders buy these (presumably lower-interest) bonds when they don't get to decide if they get paid in shares?
     
  12. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Active Member

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    #12 ItsNotAboutTheMoney, Feb 27, 2014
    Last edited: Feb 27, 2014
    I'm not sure how the cash works. One for experts. But it would naturally limit upside by providing a "buyback" opportunity for the borrower if they want to prevent dilution to protect existing shareholders. The bondholder still gets a gain, but they don't have as much opportunity to outsmart the market.
     
  13. 772

    772 Member

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    I've yet to see the prospectus, but I'm guessing that the cash amount is essentially the equivalent amount to the share price at a certain future date. Normally, the returns on these type of convertible securities can be mimicked using a combination of bonds, stock, and options... so Tesla will likely hedge themselves from future share price appreciation in order to limit their future liability.
     
  14. DaveT

    DaveT Searcher of green pastures

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    From this Barron's article: Tesla Convertibles Raise Cheap Capital for Brash Expansion - Barrons.com (note: link will likely not work, so google "Tesla Makes the Most of Irrational Exuberance" and it will take you to the story)

    "Convertibles essentially are bonds with warrants attached; in exchange for potential equity participation, the bondholders accept a lower interest yield. Warrants are long-term call options, which give holders the right to purchase stock at a set price for certain period. The price of the option depends on the volatility of the underlying stock and term of the option."

    This is a pretty good explanation of TSLA's convertible notes. As a purchaser you get a bond that pays you interest. And you also get a warrant (which is basically a call option) dated for 2019 or 2021 with a strike price of $360 (or whatever the price the conversion premium).

    "The company said it would issue $800 million each of five- and seven-year convertibles, which have dual advantages over either straight debt or equity. The notes could carry coupon rates of 0.25%-0.75% for the shorter maturity and 1.25%-1.75% for the longer one, according to estimates published by the Financial Times. And those vanishingly low interest costs are deductible, which is worthwhile given Tesla is expected to be in the black this year."

    "The convertibles also afford Tesla the chance to issue common equity at even more elevated prices. The FT story estimates the converts would be priced with a conversion premium of between 37.5% and 42.5% -- or $348 to $360 a share, based on Wednesday's closing price."

    "The rich expected conversion premiums on the Tesla convertibles indicate the company effectively is selling high-priced calls on its high-priced stock attached to its high-priced (that is, low-yielding) bonds."

    It looks like demand was very strong. There's a Financial Times story out this afternoon that says that Tesla is increased the offering and the terms are at the best terms (of the range) mentioned in this Barron article (above).
    Short-Term TSLA Price Movements - 2014 - Page 239
     
  15. Familial Rhino

    Familial Rhino Endangerous Herbivore

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    I get why it is advantageous for Tesla. The paragraph you quoted says it all:

    What I was trying to understand was what's in it for the bondholders, keeping in mind the emphasized portions:

    Originally, I had read that to mean that Tesla could simply elect to make good on the bonds at face value. That would negate the main attraction of convertible bonds for the lenders, namely the option to convert into shares (above a certain price threshold.) The only way this makes sense is if 772's guess is correct, meaning that if Tesla wants to pay in cash in order to avoid dilution, they would have to pay the equivalent of the share price on a future date (on the day of repayment?), assuming the conversion requirements have been met. In fact, the second emphasized fragment pretty much spells it out.

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    (How do I edit my post?)

    Finally, I think I got it. The price would be $360 (it's essentially a call option with 360 strike), and not "the equivalent of the share price on a future date" as I said above. Silly me. (Please correct me if I'm wrong.)
     
  16. Doug_G

    Doug_G Lead Moderator

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  17. Familial Rhino

    Familial Rhino Endangerous Herbivore

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    No, I didn't get it (and now I'm correcting myself in public for the benefit of other dummies like me.) sleepyhead nails it here.
     
  18. Clprenz

    Clprenz Member

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    So How doe sone get in on the convertable notes? I'm meeting with our 401k brokerage
     

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