The summer of convertibles in 2019 meant tech companies like Snap Inc. or industrial issuers such as Fortive Corp. could get sub-1% coupons and 40%-plus conversion premiums. Meanwhile, cannabis convertibles -- many of which aren’t due to mature until 2023 -- have had 4%-plus coupons and sub-25% conversion premiums.
“For investors, given how far out-of-the-money the notes are and current trading prices, the securities trade more as a fixed-income substitute with higher yield,” Franks said. “For the issuing companies, unless the valuations recover to 2018 levels, it means the securities will need to be refinanced at some future point.”
Last week, Aurora became the first big cannabis company to restructure its converts. It had C$230 million of 5% notes maturing in March 2020 with a conversion price of C$13.05 per share. Shares were trading at C$4.38 when it announced that holders could convert early at a 6% discount to its recent trading price. Holders of 94% of the securities took them up on the offer.
“The market was concerned about where we would get that cash to settle that liability in March,” said Aurora Chairman Michael Singer. “That’s gone a long way to strengthen our balance sheet.”
However, Aurora’s shares tumbled 29% in the two days after it announced the early conversion, which will dilute its share count by approximately 6%.
“Financings like this at these levels are massively dilutive to existing shareholders and it isn’t a surprise that they would react negatively,” said Infor’s Selfe.
The average retail investor was probably unhappy at the dilution but it provided an appealing option for institutional holders, who can see long-term value in a company that may otherwise have run out of cash, according to Cowen analyst Vivien Azer.
“Ultimately what will benefit these retail investors is more institutional money coming into these stocks and driving down volatility and making more capital available to drive share prices higher,” Azer said. “If this is what needs to happen to clean up these stories so we can get incremental institutional capital in these names, everyone benefits.”
This article was provided by Bloomberg News.