On the convertible bonds/short theory....
Here's my take:
1. The 2/1 split and the bond deal were done the same day, August 6. Therefore the conversion price is post-split (indeed, the privilege couldn't be exercised until November 1).
2. The bonds have an initial yield of 3.5% and a blended yield of 5 and change. Since you can do those those numbers in treasuries or high grade corporates with little or no risk, it is clear that the inducement in the bond deal was the conversion feature. Therefore, the bondholders bought the bonds believing that the price, which was $40.25 to $41.125 on 8/6, will easily and substantially trade through the $47 conversion number.
3. After 8/6, the stock traded on thin volume penetrating the conversion price on 8/22, 8/25, and 9/4. On 9/4 it reached $47.625.
4. On 9/5, the day CYMI pulled out of the conference, the stock traded from $46.3 to $41. Volume was (an enormous) 5,552,800 shares.
5. On 9/5 a bondholder, in effect owning a call at $47 on an issue trading almost on that number, seeing panic in the marketplace taking the price down, would have to have been, well, foolish, not to have sold short that number of shares into which his or her bonds were convertible. Even at the intraday low of $41, he or she would pocket $41 up front while risking only $6 (being the difference between the receipt on the sale and the amount required to cover by converting and selling).
6. Since the conversion feature operates as a stop loss only on the short sale, it has no effect at all on the price at which the bondholder will cover. He or she will cover as low as possible, jut like any other short.
7. Since the bonds are convertible into only 3.6MM shares, and therefore a maximum of 3.6MM shares only could have been sold short on this theory, given the extraordinary volumes in this issue, at best this theory is a partial and incomplete explanation of the recent price activity.
8. We have no clue whether the bondholders, in fact, sold short on 9/5.
9. Even if the bondholders did sell short on 9/5, they did so because of the fortuitous confluence or near confluence of the conversion price with the market price on the presentation of bad news. So even if they sold short they do, nevertheless, believe that the future price of the stock will promptly go way, way through $47. If they didn't believe this, they wouldn't have bought the bonds in the first place for the simple reason, noted above, that the yield is uncompetitive.
Hats off to Emile for presenting this to this board. Until he drew the picture, I confess I couldn't see it.
Regards,
John |
