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.