AYX: convertible note pricing

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https://finance.yahoo.com/news/alteryx-announces-pricing-pri…

Highlights:

  • The 2024 notes will be senior, unsecured obligations of Alteryx, and will bear interest of 0.50% per year payable semi-annually in arrears. The 2026 notes will be senior, unsecured obligations of Alteryx, and will bear interest of 1.00% per year payable semi-annually in arrears.

  • Note have a conversion price of $189.36. This means that the holders of the new Notes will not convert to AYX shares at AYX share price below $189.36.

  • Alteryx estimates that the aggregate net proceeds from the offering will be approximately $683.4 million (or $781.2 million if the initial purchasers exercise their over-allotment option to purchase additional notes in full), after deducting the initial purchasers’ discount and estimated offering expenses payable by Alteryx.

  • They will be closing out their previously issued notes. And they will unwind their previous calls (associated with the 2023 Notes) that were purchased to limit stock dilution as these hedges will no longer be needed.

  • AYX will be buying capped call options to protect against potential dilution up to AYX share price of $315.60 per share. If I’m understanding this correctly then AYX will be protect against dilution between a future share price of $189.36 and $315.60.

  • After paying off the 2023 notes and buying buy the antidilutive calls, AYX will net $461.5M in cash (maybe $500M considering the exercise of the overallotment).

Definitely, a good time to raise money with interest rates so low. AYX will be paying 0.5-1% interest.

Chris

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Hi Chris,

thanks for sharing this.
Seems like you have good understanding of such topic, so if I can ask a question.
Net net, this seems to me that AYX will raise $683M for 1% interest rate…

But they have to buy capped call to reduce / avoid dilution and therefore, they really get only $461M… so they paid almost $180M for those capped calls?

For 5 or 6 years period, their effective cost seems like way way way more than 1% interest.

This doesnt add up to me… I am sure I am missing some major point here… any insight will be helpful.

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But they have to buy capped call to reduce / avoid dilution and therefore, they really get only $461M… so they paid almost $180M for those capped calls?

For 5 or 6 years period, their effective cost seems like way way way more than 1% interest.

This doesnt add up to me… I am sure I am missing some major point here… any insight will be helpful.

Purchase of the capped call for $76.4M AND the cost of rebuying the 2023 Notes for $145.4M.

Chris

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I don’t understand why they can’t issue straight debt. Convertible debt is for companies that don’t generate cash flow and whose business models banks won’t finance. For a startup for instance.

But once you become “a real company”, you don’t need convertible debt.

Sure you will pay 8% for straight debt at this stage, but who gives a crap when you are growing 40% per year. Its just a cost of doing business.

Converts always cost way more in an increasing share price environment which I sure hope is the outcome management is shooting for.

So I don’t get it.

Rob

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I don’t understand why they can’t issue straight debt

Converts are cheap financing. The company can raise cash either by selling equity or by issuing debt. Convertible debt allows the company to issue equity at higher price in future (taking advantage of today’s elevated price :slight_smile: ) and if for some reason the price didn’t appreciate then the cost of debt is so cheap it could just redeem the debt.

Also, note the company has hedged the conversion price.

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Kingran,

Can’t you walk us through this issue one more time pretending you are trying to explain it to a child (and it’s a matter of life and death that the child understands)?

What I got this far from Ms. Moran at Alteryx when I asked her why Alteryx was doing this:

”It means we raised $800 million in additional capital. We did it to increase our liquidity and give us additional flexibility to fund growth investments.”

What she did not answer was my question: what is the costs/consequences to Alteryx and their investors?

Maybe you can shed a light on that? I can understand there must be some costs (dilution, hedging costs, other?) as there is no such thing as completely free money.

Bottom line: what is the net positive effect to Alteryx and subsequently their investors?

(Please use basic math examples/what if-scenarios if it makes it easier to explain)

Benjamin

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And Chris, you are also welcome to chip in :slight_smile:

Sorry, meant to address my question to the both of you — as you both seem to have a good grasp on the financing issue.

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Can’t you walk us through this issue one more time

So the company issued 2 convertible senior notes of $350 m each and an option to buy $50M more, so $400m each, one maturing on 2024 with 0.5% interest rate and other on 2026 with 1% interest rate.

Now, the buyer has an option to demand the notes to be settled on cash on maturity. Alternatively, they can redeem the notes for AYX shares, they will get 5.2809 shares per $1000 bond, or at conversion price of $189.36, which is 50% higher than today’s price. Now this can be adjusted for certain corporate events (for ex, if AYX splits its shares).

2024 note cost

Cost of issuance - $10m
Interest cost on the issue - $2M per year; $10m in total.

So AYX is going to pay $20m in total for $400m in 5 years, or 1% per annum. Now, assuming AYX has no need for this money and they just deposited in bank and they could be earning easily more than 1%, in other words AYX raised $400m cash from investors for free (actually they may end up making some money on it).

Now, if the share price increase @ 10,65% then it could get to $189.36. So this avoids immediate dilution, and allows selling the share price at 50% higher rate in future and allows the company to raise tons of liquidity at free.

1-Aug-19 126.24 10.65%
1-Aug-20 139.68
1-Aug-21 154.56
1-Aug-22 171.02
1-Aug-23 189.23

What are the downside? Suppose, AYX share price is < $126 on 1-Aug-23, then AYX missed an opportunity to sell shares at this price. On the other hand, if AYX share price increases significantly in the next 5 years, then the company sold shares cheaply. So to address this risk, the company enters into capped call. At simple capped call is a spread option. The company bought options to buy AYX shares (enough to offset potential dilution) and sold options at higher strike price ($315). What this means is this option will basically cover any dilution for the share price between $189.36 to $315.6, which is 150% higher than today’s price or 25.74% GAGR. Of course for this protection company pays $38m.

1-Aug-19 126.24 25.74%
1-Aug-20 158.73
1-Aug-21 199.60
1-Aug-22 250.98
1-Aug-23 315.60

Now the total cost for AYX is

Cost of issue - $10M
Interest on notes - $10M
Cost of the calls - $38

Total - $58 M; which roughly translates into 2.9% per year and of course this will be offset by any interest earned on this money by AYX. So at the end the raised capital is not truly free but very cheap.

So to summarize, the company raised $400 m at around 1% per year cost and avoids dilution upto $315.6, which is 150% higher than today’s price or the price has to increase at 25.74% annually before any dilution kicks in.

Hope this helps.

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Thank you very much, now I understand. I think. The numbers helped a lot.

So, basically, we can chalk it up as good strategic management — hereby assuming that the growth opportunities stemming from the new funding by far outweigh the costs of financing?

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Thanks kingran.

i admit that the convertible notes as an alternative to debt financing didn’t strike me as appealing. AYX is my largest hypergrowth holding and one of my best performers.

In choosing the alternative they did over conventional debt, the AYX leadership is assuming a maximum 25% annual stock appreciation over the next 4 years. Sure, we’d take that right now, even considering AYX has been a 9X bagger over the 28 months since its IPO.

But i continue to believe AYX is one of the better kept Wall Street secrets and is destined to become a much larger company. Perhaps management will choose to up its hedge over the next year as they increase their own confidence in continued multi year hypergrowth.

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i admit that the convertible notes as an alternative to debt financing didn’t strike me as appealing.

Convertible notes is debt financing but with a lower interest rate because the creditor can earn a lot more if the stock exceeds the conversion price. The company exchanges cashflow for potential dilution.

There is also a negative that most people miss, once the stock goes above the conversion price ($189.36) the warrant holder can short the stock with little risk.

Denny Schlesinger

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There is also a negative that most people miss, once the stock goes above the conversion price ($189.36) the warrant holder can short the stock with little risk.

Remember the hedge? The sellers of the call option… The buyers of the convertible debt in most cases trade the instrument, because the instrument has gained in value. However, certain portion of the potential dilution gets shorted. There is a nontrivial cost to the short and depending on how much time left, the cost of borrow, etc, so not all potential dilution becomes short. In any case, not sure why or how it is negative.

Also you have to count the potential dilution, which will show in the “fully diluted” count. So your EPS numbers change. But I don’t think anyone even looks at fully diluted EPS numbers…

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Yeah, thanks Denny. I know it’s debt. I should have said it’s an alternative to traditional or conventional debt.

The shorting option might hold a little more risk on a strong rapidly growing company that trades at high volumes.

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In any case, not sure why or how it is negative.

For the same reason that people get upset when Citron publishes a short raid, selling (supply) lowers the stock’s price.

Also you have to count the potential dilution, which will show in the “fully diluted” count. So your EPS numbers change.

The current GAAP rules price the warrants like options creating huge swings in GAAP earnings.

But I don’t think anyone even looks at fully diluted EPS numbers…

That’s the ONLY EPS number I look at after removing GAAP’s CRAP.

Denny Schlesinger

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Thanks for the info, Chris.
Is there a call provision?
:-)Shawn