|
|
Post by neil36 on Nov 9, 2020 23:07:18 GMT -5
Let me know if I have this right.
The Mann Group holds a $35 million note that pays 7%. It doesn’t mature until 2024, so they would collect nearly $10 million in interest between now and then. And say, if the stock was trading at $10 at that time, rather than making Mannkind come up with the $35 million in principle, they could convert it all to 14 million shares and walk away with $140 million, on top of interest collected, and MNKD would wipe that debt off its balance sheet.
Correct?
|
|
|
|
Post by mnkdfann on Nov 9, 2020 23:32:33 GMT -5
Let me know if I have this right. The Mann Group holds a $35 million note that pays 7%. It doesn’t mature until 2024, so they would collect nearly $10 million in interest between now and then. And say, if the stock was trading at $10 at that time, rather than making Mannkind come up with the $35 million in principle, they could convert it all to 14 million shares and walk away with $140 million, on top of interest collected, and MNKD would wipe that debt off its balance sheet. Correct? I would think that if the SP was $10 in 2024, Mannkind won't be sweating a $35 million payment at that time. |
|
|
|
Post by neil36 on Nov 10, 2020 7:26:51 GMT -5
I was trying to think of any motivations Mann Group might have to convert the loan to shares prior to 2024. But the more I think about it, the more it seems to make sense (for them) to wait as long as possible and hope for stock price appreciation.
|
|
|
|
Post by agedhippie on Nov 10, 2020 9:03:23 GMT -5
I was trying to think of any motivations Mann Group might have to convert the loan to shares prior to 2024. But the more I think about it, the more it seems to make sense (for them) to wait as long as possible and hope for stock price appreciation. There is very little incentive. This is why companies commonly have to buy out notes. |
|
|
|
Post by matt on Nov 10, 2020 10:01:56 GMT -5
A convertible note is a hybrid security that can be valued as the sum of the pieces. There is the value of the 7% bond maturing in 2024, the fair value of which can be estimated by looking at what companies similar to MNKD have to pay for vanilla debt of the same maturity and priority in liquidation (it would be more than 7%). There is also the value of a four-year call option to buy MNKD stock at $10, the value of which can also be estimated using various methods.
Companies offer hybrid securities because they are cheaper to issue than straight debt, and if wonderful things happen and the option portion is in the money in 2024 that is a good problem to have. Holders of convertible notes rarely convert before the expiration date because when a note is converted to stock the value of the option is cancelled, and a shareholder has more risk than a debt holder if the business situation goes south. So the winning strategy for the note holder is to hold the note all the way to maturity (or just a few days before expiration) before deciding whether to convert or not. Some holders will short the stock a few days before maturity, immediately give conversion notice to the company, and deliver the newly converted shares to the broker to cover the short; this is a common way to lock in a gain on the convertible without taking any market risk.
The one flaw in your statement is that most convertibles are structured as zero coupon bonds such that the holder delivers the bond in exchange for the shares, and since the bond includes the accrued interest, the holder has to surrender the interest when they exercise the conversion option. This does not always happen, but as I recall the Mann Group is not entitled to current interest payments. You would have to read the security agreement to discover those details.
|
|
