Clement:
I have a question about your summary.
"- For the bond holders, if Calpine hits $18.07 that's a minimum return of 23% with downside protection which is pretty good especially in this market."
If the bondholder pays $1 billion for this issue he gets two things: a 4% coupon bond and the right to convert at $18.07 per share, that is, pay $18.07 to buy one share of CPN. (Yes, there are other features, but those are the big ones.)
So if the bondholder converts, he pays (in principal) $18.07 per share, which is 23% above where the stock trades today. That is, he has the right but not the obligation to pay $18.07 per share. I don't see how paying 23% above today's price amounts to a minimum return of anything. At the point the bondholder converts, he pays $1 billion in his current investment, gives up his right to 4% interest, and swims in the sea with all the other CPN investors. Except for whatever 4% return he's received during his holding period, he's got no "minimum return."
Let's say CPN rises to $18.50 and our (former) bondholder bails. His return is $0.43 ($18.50 - 18.07 convert price), or 2.4%, not 23% plus 2.4%.
Am I missing something here?
TIA,
Kb |
