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Warrants and Convertibles

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Biodelivery Sciences Int'l (BDSI) went public on June 24, 2002. Rather than a straight equity IPO, ... Convertibles stage equity capital (back door equity? ... – PowerPoint PPT presentation

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Title: Warrants and Convertibles


1
Warrants and Convertibles
2
Some securities firms can offer
  • Equity, Debt, Warrant
  • Biodelivery Sciences Intl (BDSI) went public on
    June 24, 2002. Rather than a straight equity
    IPO, their issue included
  • 1 share of common stock
  • The right to purchase an additional share of
    common stock _at_ 6.30. The right expired June 24,
    2007.
  • The package (unit) cost 5.25.

3
Last trade 2.75 Bid 2.73 Ask 2.78
Last trade .54 Bid .37 Ask .49
4
Warrants
  • Quite a bit like call options, except new shares
    are created when the warrant is exercised.
  • Black-Scholes price for warrant will be too high
  • Unit IPO Example
  • BDSI sold 2 million units and had 5.15 million
    shares outstanding before the offer.
  • They have 7.15 shares outstanding now. If
    warrants are exercised, theyll have 9.15 million
    shares outstanding.
  • Call options can be valued w/o considering
    dilution factor, warrants cannot.

5
Convertible Bonds
  • In 1999, Amazon raised 1.25 billion by selling
    convertible bonds with the following features
  • Coupon rate 4.75
  • 1000 face value in debt converts at any time to
    6.41 shares
  • Effectively, this is like a 1000/6.41 156.01
    dollar conversion price
  • Stock price at the time was around 120
  • You also have to consider missed interest
    payments and (possibly) dividends

6
Value of Amazons convertible
Conversion
Value of Amazons convertibles
Default
Value of Amazons assets
7
Convertibles cont.
  • Convertibles are a lot like bondcall option
  • Except, again, new shares are created
  • Bond is forfeited when conversion occurs
  • Convertibles are a lot like bondwarrants
  • Except they are indivisible and cannot trade (or
    be issued) separately
  • Bond is forfeited when conversion occurs

8
Reasons for warrants and convertibles
  • Bogus Cheap debt or equity
  • Not if investors pay a fair price!
  • Possible explanations
  • Warrants stage financing, a la venture capital
  • Convertibles stage equity capital (back door
    equity?)
  • Converibles may mitigate the games between
    shareholders and bondholders.
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