Wednesday, August 20, 2008

A Note on Convertable Bonds.

Form F-3ASR

I think I figured it out in the shower this morning (nothing like a good shower for clarity of thought).

Crackhead has mentioned several scenarios involving the CBs, and the point I've been trying to make has to do with the fact that the redeemer does not get to choose whether they will recieve actual shares, or a fair cash value.

So, yeah, these ain't your Granpappy's Convertable Bonds.

These are Chinese Short Trap Bonds.

Ok, so with a normal CB, the buyer has the right to redeem the bond for shares. So, a short that holds a normal CB doesn't care if the price goes from $30 to $200, because that bond will make them even when it gets redeemed.

With these ones, the short buyer doesn't know whether they'll get Shares or Cash. It's a roll of the die as far as they're concerned.

Ok, so the question: Well, what if they do only get cash? They recieve a fair value for the shares in cash and they can just buy shares, right?




Um. What happens when you buy shares, and there are few to be had? You drive up the price, of course!

Also, the calculation of fair value for the shares is an average based on some number of days of PAST performance, so while various shorts are taking that cash and buying up shares and driving up the price, later short redeemers are recieving payment for the bonds that is LESS THAN THE CURRENT PRICE OF SHARES.

They lose money and drive up the price of shares at the same time!

What say you all?

My only real question is whether anyone has ever seen such a Convertable Bond Setup before. Anyone? Anyone? I'm pretty sure that this isn't standard.

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