ShmoopTube

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Finance a la shmoop..what is a busted convertible?

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well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]

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could sever their heads freeze them and in 40 years they would have technology

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to have them reborn into a really cool robot body and yeah kim kardashian model

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was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred

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dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]

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America and Africa but they didn't want to suffer dilution by just selling

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equity or part ownership in themselves to the street at least not at the

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hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]

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to fund these new offices because well they thought their stock would easily

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get to $250 a share in the next few years

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tons of people out there who wanted to you know live forever

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you know like fame.....nevermind their bankers were nervous about how

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investors would react to just a straight bond which carried 8% interest so

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instead they kind of compromised by doing a convertible preferred stock [Men give handshake]

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offering they sold preferred stock to the street that carried just 3% interest

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but those preferred shares were convertible into common stock at a

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hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]

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clipping their three percent coupons until one day the stock hit a hundred

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seventy five bucks or better well and then they could participate in the

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[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop

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video....Test came back from the early decapitating trials and well they were

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oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]

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just didn't want to go there they'd rather truly rest in peace so the stock

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cratered down to $20 a share where it would sit for all eternity in what is

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called a busted convertible and took us a while to get there but we got

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there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]

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had and a convertible stock is so far below the conversion price of $175 well,

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investors assume it will never convert the investment case views

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the convert solely as a preferred or kind of like a bond offering against

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competitive bond interest rates so yeah that's a busted convertible although so

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is this they really never should have given robot Kim K a driver's license [Robot Kim Kardashian beside an upside down, crashed car]

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