Unexpected Guidance Updates from SQ

Square, Inc. (SQ) lowered its first quarter and full year 2020 guidance to reflect the impact of its issuance of $1.0 billion in aggregate principal amount of 0.125% convertible senior notes due 2025 (“Notes”).
https://seekingalpha.com/pr/17801739-square-updates-first-qu…

I was caught off guard by this announcement:

  1. The previous guidance was given in the last ER on 2/27/2020;
  2. SQ announced issuance of 1B notes on 3/2/2020 - that’s 5 short days after!
  3. SQ gave an update with lowered guidance on 3/6/2020 - that’s 4 days after.

Now, my question is: was the issuance of 1B notes unplanned? If so, how do they manage their business? It sounds pretty odd to me.

too bad I just bought into it last week. I am out next week.

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Klay2,

Not sure why this would rattle you. Companies borrow for business purposes all the time. The interest rate is very low…almost free money. I would be interested inn learning how this money will be put to work.

No big deal, in my book.

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Hi, etagordon-

I was not bothered by SQ borrowing money. I was bothered by the timing of the guidance updates, all happened with week. 1B, that’s not a trivia amount. They know they were going to borrow that much money. Why did not factor that in when giving guidance in the ER?

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Discussing the deal before it happens might affect the share price and thus conversion strike price maybe?

They raised the next Q and 2020 full year guidance in ER. Now they are lowering the numbers, after a few days. Do you think that’s prudent to do? The guidance is never accurate, most of the time. I don’t think they have to mention the planned issuance of the notes to give guidance.

Klay2

I think of square like a credit card on steroids. Given all the furor over corona virus, I am not surprised. Ditto for my Visa and MC holdings.

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Also, bond prices have been very volitile these days. It’s possible, given the amount, that they’re underlying assumptions about costs changed enough to force them to update guidance. With bond rates falling (a good thing for borrowers like SQ) prices would increase.

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Here is an article discussing the notes offering details. It sounds actually like a great deal for SQ.

https://finance.yahoo.com/news/square-inc-announces-pricing-…

“The initial conversion rate for the Notes is 8.2641 shares of Square’s Class A common stock (“Class A common stock”) per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $121.01 per share). Prior to the close of business on the business day immediately preceding December 1, 2024, the Notes will be convertible at the option of the noteholders only upon the satisfaction of specified conditions and during certain periods. Thereafter until the close of business on the second scheduled trading day preceding the maturity date, the Notes will be convertible at the option of the noteholders at any time regardless of these conditions. Conversions of the Notes will be settled in cash, shares of Class A common stock, or a combination thereof, at Square’s election. The last reported sale price of the Class A common stock on March 2, 2020 was $80.67 per share.”

“In connection with the pricing of the Notes, Square entered into privately negotiated convertible note hedge transactions with some of the initial purchasers and other financial institutions (the “hedge counterparties”). The convertible note hedge transactions are expected generally to reduce the potential dilution to the Class A common stock upon any conversion of the Notes and/or offset the cash payments Square is required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price of the Class A common stock is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the initial conversion price of the Notes. Square also entered into privately negotiated warrant transactions with the hedge counterparties. The warrant transactions could separately have a dilutive effect to the extent the market value per share of Class A common stock exceeds the strike price of any warrant transactions, unless Square elects, subject to certain conditions set forth in the related warrant confirmations, to settle the warrant transactions in cash. The strike price of the warrant transactions will initially be approximately $161.34 per share, which represents a premium of approximately 100% over the last reported sale price of the Class A common stock on March 2, 2020, and is subject to certain adjustments under the terms of the warrant transactions. If the initial purchasers exercise their over-allotment option to purchase additional Notes, Square intends to enter into additional convertible note hedge transactions and additional warrant transactions with the hedge counterparties.”

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Klay2,

One way to look at it is that square traded bonds for cash, of which it had plenty on hand for continuing operations. What, other than an acquisition, would require such an amount of money?

Gordon