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Paul Latronica

lines on the record: 105
first: 2022-08-29
most recent: 2022-08-29
sittings or episodes: 1
sources: podcast

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“The back end recovery through that financial crisis on the back end of the financial crisis, the convertible market, given the fact that you had both credit and equity driving valuations for the back end on the upside, gain back all of its losses towards the back end of 2009 where it took the S&P, I think, 2012, 2013 just to break even. So the convertible market came out of that in a pretty strong manner. Since then, there was ebbs and flows with different types of things going in the market where it came to issuance and companies coming to the market. There was a point where a lot of REITs used the product, different types of technology companies, consumer companies.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Back pretty hard right with the rest of the market, but managed strategies tend to hold up much better than the broader marketplace, especially if you looked at it through the eye of a credit perspective, right? The credit perspective of the names that held up in that period”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“You know, that whole run in technology and dot com bubble.com burst area. And people will be surprised. I mean, Apple had a convertible back in the day. Amazon, right? When they were a book company, they issued three convertibles over their lifetime. And there was one point people were afraid that we weren't going to get paid back. Amazon, how can you even believe that? But those were the type of companies that were moving into the market. So as the product got more institutionalized, more players got involved, mutual funds got involved, ourselves, outright managers got involved, and larger asset managers got involved. And we're really selling this into like, you know, the traditional circuits, the traditional pension allocators, endowment allocators, and different retail platforms. And the market itself began to grow on itself, hitting a height in about 2007 prior to the great financial crisis, which pulled back in that period, converts, pulled back.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Some securities are still built this way where you have puts as well as calls. So that product itself started a larger institutional following, right? And then the market exploded the upside and became more of an institutional investing type scenario. So fast forward to it, I got involved in the marketplace 25 years ago. A gentleman in that group at Merrill spun out of Merrill Ench after about 12, 13 years of running that desk and being one of the top sales producers. His name is Tracy Maitland. He jumped out and he started Advent Capital where he saw this institutional demand for the product, but no one really servicing the product, no one really selling the product in like a management way, right? Asset managers out there selling the product as a standalone product. So initially, the market was, you know, I joined in once in 1997 right prior to.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Akroning for the liquid yield option notes, right? And what this did was it created this whole marketplace where companies can come to the market. They would issue original issue discount, discount convertible bonds, and the traditionally these bonds would have 20, 30-year maturities, right? But what they did differently here is they put puts in along the way, right? They restructure this product. They put puts in along the way. So me buying a 20-year credit, that's really difficult. That bond is going to be very volatile. But now you have a three-year put, well, that's interesting, right? Because you have an accretion to the bond of the original issue discount because it will accret to a certain put price, which was higher than the offering price, but you also have that equity optionality, which created that floor to the bottom side.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Where, in general, bond markets were becoming more tradable. They were becoming more open to more daily trading in volumes, where historically you'd buy a bond and hold up maturity, right? That's how the bond market worked. Now they become trading instruments where people were moving out of them a bigger size. And then what are the houses? Merrill Lynch saw this opportunity to create a product that would be more institutionally friendly, right? And that was, I mean, it was called Alliance.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Fund their growth, fund their expansion, and like we've internally we have, we call them the professor, someone who used to work with who's now retired from the firm, who they look back historically. And going back to the 1800s, converts were used in the railroads, right? You had these innovative transportation companies looking to expand out west, and they needed money. They used convertible bonds, right? You go forward into the early 1900s. It was American Telegraph and Telephone, AT&T as we know it, General Electric, Westinghouse, names like that, technology names like that. But now you come forward over the years, the convert markets always kind of been this retaily, you know, 50 billion or so sized market until a real change occurred in the 1980s where basically bankers just like we're looking at the product and they started to get more innovative and really innovation came”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, 2007 was the point we got to that size in the marketplace. Correct. Over time, converts have always been used as kind of like this mechanism for companies who are kind of newer to the world and to”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Hundred billion in size, which is very large historically the last time we hit that point was probably back in the early parts of 2007. And it just attracted different types of investors. A question?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“And the transportation type companies like the Dick Sporting Goods and the Blooming Brands and the Burlington stores who needed capital just to run the business at that point, right? Market shutdown, revenues go to zero. And then that was followed by technology companies and additional type consumer companies as the process went on that they look, there's this big shift of we were in an office environment, now we're home, software companies are expanding pretty strongly. The technology is being adapted. We need money to continue to improve what we're doing. And that was a big move on the back end of that. The market grew, right? And then from there, you just had this just expansion of players within our marketplace because now you had this larger opportunity set. Market grew over six.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so look, I mean, interesting anomaly in the marketplace, and it really has to do with kind of the whole impact COVID had on our market and the point leading to where we are today. So COVID hits March of 2020, everything shuts down. And, you know, basically, world comes to a stop, right? A lot of companies, they're not really built to work with no revenue in a shutdown mode. Quickly after you had kind of that liquidity insertion from the Fed, you had a lot of companies looking to access the marketplaces. So they issued debt, they issue converts, and the converts came in in size. So over the course of the last two years, the market expanded considerably with over two years of $160 billion plus of new issuants coming to our market, initially starting out with the retailers and the”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“So here you're buying very cheap volatility, a fixed income instrument with a potential for outsized returns, but with the protection of you'll have a slight positive return to par, right? Some positive return to par. And that part of the market now has become extremely interesting as obviously with all credit instruments, all credit markets, the yields have expanded somewhat, right? And so a portfolio of these credit instruments could yield five, six, seven percent, and you have options on equities that have dropped precipitously in the marketplace. So this is a part of the marketplace that, again, less trafficked but has become more and more attractive to certain groups of investors.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“These equity options have fallen out of the money, but look forward two, three years from now. I mean, are they going to, these stocks are going to be trading at the same spot? There's a good chance that's not going to be. There's a good chance there's some value in these options that can be unlocked over to three to four year period to these bonds maturities. So it's an interesting way to source fixed income securities and long-dated options attached to them, not trying to be complicated because those options just sit within the structure, right? And to try to go replicate that, very difficult. I mean, one, you can't really find three and four year options out in the marketplace. And the volatility you're going to pay for that is off the charts, right? You can't source that.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Really looks for that higher correlation to equity, this credit sensitive part of the market is just less trafficked here. So the profile is really just investing in securities that have limited downside in the shorter term, but have a large potential upside because these stocks tend to be out of favor, the bonds are trading at discounts. And again, the worse you're going to do is bond accretes to par and you collect your coupon and the bond accretes to par from the point of purchase. And the best and what we often see, it's this equity where the option has fell out of the money and the stock is depreciated precipitously, whether it's earnings call or whether this recent macro sell-off.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Because it's a strategy that's investing on a credit basis with the idea of preserving capital with a very defined downside utilizing this convertible instrument and the defined downside is the credit floor. But the outside upside comes from your sourcing three and four-year options that are strapped onto these bonds that at this point of their life, they're less valued by the market because they're out of the money, right? The traditional convertible investor.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“That you want to portfolio of fixed income instruments, but a short duration, right? If you look at the ag that's, what, five, five, six year duration, obviously government bonds even longer out, high yields around four or five years. So it has different drivers of that return. So within this credit sensitive part of the market, this is where I invest for my client base and it's really attractive to two groups, right? It's the institutional account that's looking for diversity or enhanced fixed income type solution, right? Some way to adjust their or some way to enhance their fixed income returns, utilizing fixed income instruments, low volatility instruments, low standard deviation, but gives them excess returns over the cycle. Additionally, another part of the market that's very attractive to this part of the market is simply the wealthier individuals, private wealth groups.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. So look, so in my firm, we do focus on both the credit sensitive and the balanced portion of the marketplace. And there are two distinct products that we have out there. And what we're trying to do really is appeal to different investor sets. So if you're looking at the credit sensitive portion of the marketplace, you really are creating a portfolio of fixed income instruments with three and four-year options attached onto them, which can give you, I guess, a different type of return profile than say just owning a portfolio of straight debt, right? One of the things I haven't mentioned yet is, you know, a big thing in fixed income, obviously, is duration. What's your duration exposure? And how does your portfolio going to react when rates are rising? A typical convertible portfolio has a 2.2 year duration.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Convert issuers tend to converts tend to be the only debt on the balance sheet, it's low interest expense. And overall, that part of the market, that part of distress market is much lower representation.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“They tend to have light balance sheets, right? And convert can be the only issue that they have in their balance sheets. So there's a large percentage, about 52% of convert issuers where the convert's the only debt, right? The interest expense is much lower if you think about a traditional default, like in a high yield name or heavy capital structure name, that default usually occurs with a missed coupon payment or something. Well, convert companies, again, lighter balance sheet, not a heavy interest expense, well, they can tend to try to work this out prior to that point of you becoming current on that bond. When I say work this out, they can restructure and convert. They can issue stock. There's many things they can do that can solve the maturity coming up opposed to what would happen in a traditional credit market.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Lose less on the way down over time, that string of returns is going to be much more advantageous than, say, just straight fixed debt, but much more advantageous than even equities over time, right? Because on these big pullbacks, there's a cushion to the pullback in your underlying security evaluation. And again, as long as you're avoiding these things that are falling in this distress level, the things that are falling off hard. But to mention that, if you look at defaults in general in our marketplace, historically we went back to, I think, the early 90s, convert defaults around 1%. And that's relative to high yield and even leveraged loans, which is approximately 3%, right? So it's a much lower default rate within our marketplace. And there's a few interesting reasons why that is, and you hit on it earlier, that companies that come to the convert market.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“have a like the bond will start losing value you go over to the stream left when you're talking about distressed this is a whole different part of the market where now we have accredit event occurring and the bond floor starts to deteriorate because the credit of the underlying company starts deteriorating so this on the far left where it says distressed i think idiosyncratic credits this is the point where you have that fall off in equity value along with credit value So this is that plunging distress type security. But the sweet spot, the more asymmetric spot, becomes in this area between credit sensitive and balanced securities, where you have that positive asymmetry, where you invest in a security and it will outperform the stock on the way down by losing less. But eventually, one for one, move with the stock on the way up, right? So this upside capture, and then there's a downside capture, which will be less. So over time, you make more in the way up, you lose a little more.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“The green dotted line, which represents what the equity value, starts to converge with the value of the convertible. This is a bond with the options going way into the money, right? The stock is working, it's ripping, and now the bond is creating in a very low premium, no premium, and the option is going to trade almost one for one with the stock. Conversely, you come down to the left and you see that orange line starts to kind of level off where you hit that bond value. But the stock is continuing to fall, right? So here the bond valuation is breaking away from the equity because the equity is losing value, but your value and your security is being held up by the fact now that this is a fixed income instrument, that it's a fixed income value that's going to hold up, so it's going to dampen losses. It's going to protect your downside, even if you got the stock wrong. Even if you bought this and the stock goes down,”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Whatever this credit is, it's got to trade to this yield to maturity that diagonal line coming across your screen, I think it's green diagonal line, that represents the value of the stock underlying each bond or the bond in this particular situation. And then the orange line that comes across, that's how a convertible bond acts at any two points. So if you start in the middle of this page where it says, I say start where it says convertible price and you start moving up to the right.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Its equity-like returns over time, but with a much different risk profile, a lower risk profile than straight equities and owning straight equities. Why? It's because when that equity loses value, right, you don't lose as much in the fact that you're basically stopped out at par, right? If you buy a bond at a premium, you're basically stopped out at par. If you buy a part of the discount, you're basically going to have that accretion to par for a positive yield to return. So I see you brought up the old traditional convert, what we call it, the graph here. And it really breaks the market down into the two parts, which are the valuation points, what values you convert, and how a convertible price acts over these periods. So that middle line where it says bond value, right, that represents the fixed income value of the security. No convertibility. It's straight debt. It's got to trade at a certain yield to maturity.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Markets moving higher like you had in the back end or the early end of 2021, and like the market becomes more equity like and it takes on more of that equity like profile as those options go in the money and the deltas of the market or the individual securities get higher. So depending on where that bond is in the curve, it will attract different types of investors who are just looking for different objectives, right? The key to converse, as I said.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Highly correlated as that option goes in the money, right? So on the lower end, it's more enhanced fixed income with a lower equity correlation. In the upper end, it's more of a low vol equity type strategy. And that's how you kind of divide the market to really be attractive to different participants, different investors, right? Some can use it as a fixed income substitute. Others can use it as a low volatile equity. So when you're thinking about how the market moves and how the securities work, when you have those big pullbacks in the market, you get more representation in that discount part of the market, more discount bonds, more bonds that are trading closer to their fixed income value, right? Strip out the convertibility. This bond is basically straight debt. What's the yield that you trade to? And that really attracts more of a fixed income crowd. Conversely, when you have...”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“So look, the market gets divided in two pieces. It becomes a fixed income portion, a fixed income market, those bonds that are trading at a bigger premium out of the money option that are trading at a big discount to the issue price of 100. So bonds trading in the 60s, 70s, 80s, those are more of a fixed income-like security. And we look at that as more as enhanced fixed income, right? It's a diversifying way of getting fixed income exposure, but very different than what you would allocate in a high yield bucket. You have technology, healthcare consumer, which is very heavily represented in the convertible world relative to energy, industrial, media, telecom, which is in the high yield world. And then that other part of the market, which is more of a low-quality equity, right? Because you have that delta, because you have that attachment, that option correlation as the stock moves up, it'll be high more.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Can you speak to that correlation? Because I imagine there are a lot of times, and I think we've seen this over the past two months, where as stock prices rise, interest rates fall and credit spreads narrow, right? So is it to what degree is it sort of, they're quite correlated to each other? Because like if there is a company that issued a commercial bond and it goes bankrupt, of course the stock's not going to go down and the bond went down too. So they're somewhat correlated, right?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“So earlier on, you said that there's a nature that once the option is not really in the money, it's not as correlated to the equity price, right? Because if something is extremely in the money, it essentially is the stock and the stock is going to be correlated to the stock. But when the equity option is out of the money, it's going to trade more like a bond.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Look more in line with the SP versus high yield and other fixed income indices, has more of an equity-like return, even though you're investing in the security of straight debt. So it's an equity option that kicks in over time. When it goes from consumer names to technology names to transportation, Airbnb, bookings, holdings, the travel names is a big diversity, big diversity in market caps.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Cheesecake factory, right? Diversification. Then you go over to your Twitters and your Snapchats and your social media names that earlier on in life. Needed funding when again market cap was there, growth was there, but profitability was maybe a year or so out. And really what the key is when you're investing in these securities as you approach it from a credit perspective, right? Because you've got to look at this as debt instruments which have equity kickers or equity options that are strapped onto them, right? Because ultimately the protection and the security comes from the credit holded up over the course of that investment, right? The additional upside, the equity-like upside comes from making that credit investment and then the story or the growth of the company kicks in, the profitability kicks in, and then that equity increases and drives that greater return, that equity-like return over time. And as I mentioned earlier, you look at convertible returns like Bank of America did a study back to 1973 forward.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Sure, sure. You have those type of companies that are finding their way towards profitability. And then you have those type of companies. Like you've mentioned, Uber, Lyft, they're in our marketplace. The one thing that is interesting about a lot of these names is if you look at the market, 70% of the market has market caps above 5 billion, right? There's a perception that it's a small cap market. It's not like when you look at the broad base of it, it's not it really runs the gamut of capitalization. So just as a disclosure, names I name, they're in the marketplace. We may, we may not own them, but am I promoting them in any way? I'm just going to give you a taste of like what's in the market. The airlines, Spirit Air, JetBlue, Air Canada, they all accessed the market over the last several years. A dick sporting goods, a cracker barrel.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Those types of companies, right? Like Apple, Tim Cook, he's buying back stock. He's extremely defensive of his equity, of the shares outstanding. He wants that number to go down. And if you buy or convertible bond investor buys a convertible bond from Apple and Apple goes up because the price of Apple tends to go up, the stock, then Apple gets diluted, right? So there's something of, tell us a little bit about the sorts of companies. Like there are those sorts of draft king-like companies, right?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“That they're accessing. So I would push back at you and just saying that no, it's not these end of life companies that you need financing at any cost. They're companies that tend to have really innovative, smart leaders, smart CFOs who understand that there are different ways to finance the business going forward, not just selling equity right here, right now, right? So these options have been created over the years with bankers structuring all different types of vehicles and converts have been innovated over the years really to address that part of the marketplace. The part of the marketplace that would basically be raked over the coals to go to a straight debt market or would not even be considered, right? And the market has really over the years funded some companies like a lot of innovative companies back in the early days.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“That are just expanding what type of capital they're raising, whether it's airlines or cruise lines or retails and consumer type companies, names that everyone knows, just utilizing the product for those reasons just to gain capital and expand their balance sheet.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“There's this misnomer that it's death financing. It's the last option for companies to come to the marketplace. But I think that's exactly it's something of the past where that was, you know, the last option a company had, bring to the convert market. I think now what you're seeing is because of the way the world is changing so rapidly and things and technology are changing so rapidly that the traditional company, I mean, a lot of the S&P companies are not these plant and material heavy companies that access the high-yield or straight debt markets. There's innovative technology. And when I'm saying that, we're not talking about these pre-funded early spec type situations. You're talking about companies that have large revenue bases investing in sales, investing in growth. And on the other side, you're talking about established companies.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Unlikely not going to be doing a convertible bond, right? You framed it in a way that highlights the positive. You said growth companies have a big potential for growth and that's attractive to equity investors. But isn't it true that fixed income investors, they're interested in safety and they like to lend against collateral? So typically a company that is speculative and we can get into names later, a company that is losing hundreds of million dollars a year, at least in net income terms maybe have not adjusted EBITDA terms. And they don't have a ton of collateral that can be lent against. Those are the companies that would be selling convertible bond. Why are they selling convertible bond? Because they don't want to dilute their equity and they can't really sell debt unless at a very, very high coupon, right? So to what degree, pushback.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“So, Paul, there are qualities of convertible bonds that are attractive for investors. And as a result, they're somewhat unattractive for issuers. In other words, like why do you, why am I giving you this sort of optionality? So there's in the insurance, there's this, and I guess economics, there's this concept of adverse selection. So if you're selling car insurance, you're selling extreme crash crash insurance for sports cars. Like, I'm not going to buy that crash insurance unless I think, oh, I'm going to crash my car, right? So the people who are going to be extremely good people to insure are not going to be banging down your doors. You're only going to get people like me. Likewise, if I'm, let's say, the super innovative company and everything's going well and I'm making a billion dollars a year and Bill Gates' family office is trying to call me to invest and I'm just not picking up the phone.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Tech heavy type stuff, um, but they have a lot of growth in the prospect, so people are willing to lend to them based on their growth prospects and just based on the current operating of companies.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely, absolutely. So, what you'll tend to see in our marketplace is you'll have younger innovative type companies, growthier companies that are utilizing that kind of resource of volatility, which doesn't sit anywhere on a balance sheet, but it's something that's free to them. And they'll sell that to the market in return for a lower coupon, lower interest expense. So at that point of growth, that pivotal point where they need their capital, they're not sending out these big coupons to investors. They're able to hold on to it. Their trade-off is that, look, If the stock doubles or continues to go, it will basically be converted. It'll be dilutive at a higher level. But with the other alternative was either selling that stock at a discount, which it would have been dilutive anyway, or go into a straight market, which one may not lend to them because the companies tend to have less big capital, like less big materials and capital structures. They tend to have a lot of IP.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Gonna put these options in the money in the future, right? So an issue and company. They trade off When an issuing company will basically be selling volatility to the market, selling volatility of the market is something that they don't value on their balance sheet. It's something that they have based on the movement of their underlying equity price. And the higher volatility, the higher percentage that the company can sell that strike price or convertible debt above where the stock is.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“You pay for it with a reduced coupon, right? So what we say is these bonds have what you call positive asymmetry. You have a defined downside barring any type of bankruptcy or credit event. You have a defined downside of 100 cents on the dollar, right? Your upside will be unlimited based on where it trades. So if you look at like discount convertible bonds and you were able to buy bonds at 85, 90 cents on the dollar, like your downside is basically the accretion to par and your positive return of the debt. Your upside is going to be that equity option kicking in and give you excessive value over the time to maturity, which is three to four years out. So it becomes an interesting positive asymmetric investment proposition and you're tending to access growth your companies. Companies that have those trajectories that potentially are”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Right, but so this is an advantage for investors like you, but a disadvantage for companies is that if they just issue the pure stock and IBM goes from 136 to 100, you participate in that loss. But you as a convertible bondholder, you only get the optionality on the upside. So that makes it seem like there are things of convertible bonds that can seem very attractive to investors. But I imagine there's no such thing as a free lunch in that you pay for it, like, right? You have to pay for that conversion, right?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Growth in this company and for the issuer, right, it's a lower coupon, it's accessing different markets, and it's just diversity within their balance sheet.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Correct, correct. And that's exactly why it's interesting to companies to issue this kind of debt, right? a tech company wants to issue capital they go to bankers and what do bankers say okay maybe we can issue stock tomorrow let's issue 200 million dollars worth of stock or we can issue a convertible debt so what's what's the positives negative each if you issue stock you're going to have to issue at a discount maybe 10 15 percent from where it's trading currently i'm also selling into the same investors the same investor group that currently are sponsoring my company If you issue a convertible debt, Well, here's your ability to issue debt, spread it out your balance sheet, access different investors, and now you're selling that stock, not at a discount to where it's currently selling, but a premium, right? So you'll sell that stock at 30, 40% above where it's currently trading. But what's the trade-off of that? For the investor, for me as an investor, I take a lower coupon, right? Because with that, I'm getting access now to five years of potential.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Right. So when you said $800 worth of stock, was that assuming a sort of delta of one or was that based on the conversion price, right? Because also is the conversion price when you buy from a primary issue, not secondary, from a primary issue, when you buy a convertible bond. The strike price or the conversion price typically higher than the current price of a stock.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“You will get your coupon and you got to get par back at maturity. The beautiful thing on this and why if you look over history converts have more equity-like returns versus fixed income, even though they're fixed income instruments, is the fact that you have that equity option that protects on the downside where if the stock doesn't perform, but if the stock performs, you get to participate in that growth over the course of that debt being outstanding, right? So you're getting an equity option on a piece of debt and you have the ability to participate in the growth of the underlying issuer. Unlike straight debt, where you're just going to get the coupon and part maturity.”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Nothing happens to the stock in the period it's issued right stock goes lower nothing happens it doesn't change it you know opens at 100 closes at 100 you'll get your coupon you'll get your par back at maturity the stock drops by 40 in that period because it's straight debt”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“So a couple of issues, a bond, it has a thousand dollar face value. Underlying that bond is $800. I'm just going to forget about it. I'm just going to say $800 worth of stock. In the course of the life of that bond, right? The stock can move higher, can move lower, or do nothing. So five years to maturity, you have a thousand dollar bond with $800 to stock. The stock doubles in that period, right Come to the maturity point, it's a bond, it's going to mature apar. Do I want to put this company back to the company and put this bond back to the company and take my thousand dollars? Or since it's doubled, I have $1,600 worth of stock, right? Do I convert that and take the $1,600? Of course I take the $1,600, right?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT
“Okay, okay, yeah. So they sell a bond at a thousand and they have an option attached to convert to eight hundred shares. So if the current price is 136, that's the spot price right now of the spot price of the stock, 136, would the strike price of the option be out of the money? Would it be higher? Would it be like 150, 160? What sort of thing would it look like?”
2022-08-29 · Forward Guidance · Convertible Bonds: The Everything Asset Class | Paul Latronica · IDENTIFIED FROM THE TRANSCRIPT