Hidden Opportunity: An Overview of a Promising Company's Busted Convertible Bonds

A situational assessment of a high-yielding, busted convertible bond

Executive Summary:

In this post, I discuss a deeply discounted convertible bond otherwise known as a “busted” convert. The company is a relatively new entrant in a highly-competitive but high-growth industry. Despite no discernible traditional credit characteristics, I think the situational context provides a margin of safety, likely ensuring that the bond will ultimately be repaid at par. If this plays out as I expect, I think one can earn close to a 20% annualized return over the next 3 years.

I think this opportunity exists due to the absence of carry, unfavorable traditional credit characteristics, and overall business/industry ambiguity, leading to limited investor demand. In fact, these busted converts lack a natural buyer base as this is too hairy for long-only credit investors, too low yield for distressed funds, and largely inactionable for the majority of convert-arb funds.

Disclosure: The bond is privately placed and can only be bought by QIBs. The information provided is for informational purposes only and should not be considered as investment advice. Any investment decisions made based on the information provided are at your own risk. It is essential to conduct your own research and consult a qualified financial advisor before making any investment decisions. Investing involves risks, and past performance is not indicative of future results. By using this information, you acknowledge that you are responsible for your own decisions and release me from any liability. Seek professional advice tailored to your financial situation and objectives.