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Non-Tech : Convertible Bonds -- Ignore unavailable to you. Want to Upgrade?

To: Alex who wrote (71)	6/7/2003 3:39:17 PM
From: David Lawrence	Respond to of 83

>>How common is it for the holders of these debentures to short the common stock? Very common. Issuing convertible debt is an open invitation for the buyers to short the stock and play it for the spread. When (if) they convert depends on the interest rate, spread, conversion price, and maturity price. Too many variables there to make general assumptions.

To: Alex who wrote (71)	6/7/2003 3:50:44 PM
From: Rocky9	Respond to of 83

"at what price, in general, would it be reasonable to expect the holders of those debentures to convert them?" In my experience, the holders will not convert until forced to by the company, which "calls" the bonds for redemption (knowing full-well that the holders will convert instead of taking cash). Since the holders are receiving interest income and generally the common pays little or no dividend, the holder will keep the bond. This assumes that the only reason that the holder would convert in the first place is that the bond is "in-the-money," or that the common is priced over the conversion price. There is absolutely no reason to convert if the common is below the conversion price. Again in my experience, the common usually is FAR above the conversion price before the company falls it for payment. In other words, the company does not want to dilute the common unless it is sure that the stock will stay above the price (clearly is might not be true if the interest rate is higher than the company can otherwise borrow at). Another reason that a company might call the bond (causing the conversion) is that it wants to issue another bond and wants its balance sheet stronger so that it is easier to sell the new bond.