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10/04/17
09:50
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Originally posted by iamjb46
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Actually the underwriters of the 11% bond, and the vast majority of the buyers of the bond were not cvt guys, and did not treat this as a cvt. This was a High Yield deal, with penny wts (only a term, the cost was 0) included to sweeten the offering.
The problem with ascribing anything more than intrinsic value to the wt is that there was/is nobody that wants to pay that. Knowing that you can't sell the wt has to make the portfolio manager question the applicability of the Black Scholes pricing model. It sounds fine, but when you have hedged up the common at $0.91, or $1.00, or $1.27, and the stock never reaches $1.28, but stays above your cost and below your strike, you aren't worth much salt.
That 10% you are talking about would make a PM very horny if there was a way to realize it. The only time you can realize the time value of your warrant is if you sell your wt. The 55mm wts are not worth anything if you cannot sell them.
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Originally posted by iamjb46
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My most recent comment was trying to show the low probability of the shorts being hedged by the wts., as well as question tuna's characterization of the underwriters and bond buyers. The concept would make sense if the Black Scholes valuation model was applicable for a real trade here. In this situation, you can establish and trade off of a real value when shorting the stock, but because of the things i mentioned, on the wt side you only have theoretical pricing. I think the bottom bottom line is that GR tried to fit two "One size fits all" shorts on QIN, one being the "ponzi" allegation (check out Ackman's pain in his Herbalife trade), the other the "we don't trust any Chinese company, so if target has done business with a Chinese company it's a fraud" (somebody is doing billions of real business with Chinese companies, must be something to do with a quickly developing consumer class with a billion buyers, and super low labor costs). It seems QIN may have been deceived by the Chinese buyer, but I think there are one or two other buyers in that country. QIN isn't a small company dependent on one buyer, or even one product. Multiple revenue streams with years of runway, no debt maturities in sight, and no covenants to break. "IF THE GLOVE DON'T FIT YOU MUST ACQUIT", or cover!
ps. One last thing, I love this company, but it is nowhere near investment grade. Smack dab in the middle of Junk, which is still a fine place to be!
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I don't know where you have got the idea that black scholes doesn't apply because it's not tradeable - but it's not right - otherwise they would simply exercise the warrant and hold the stock! Nowhere in the derivation of Black Scholes, GARCH or the binomial models of option pricing does it require the option to be tradeable, and it would be trivial for the owner of a warrant to either go to an investment bank and ask them to make an OTC hedge (short stock, long put) or just hedge it dynamically themselves.
Further, when TFS was trading at $1.70 with 18mo of time value, the option would be valued at around 47c, making 55m warrants worth about $27.5m. Any bond fund manager who left that totally unhedged would likely be fired!