Fundamental: Sell the bond and buy the stock.

Sell the bond and buy the stock.

Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=520
Printed Date: 04/May/2025 at 8:46am

Topic: Sell the bond and buy the stock.

Posted By: kulman
Subject: Sell the bond and buy the stock.
Date Posted: 23/Oct/2006 at 1:48pm

Basantjee

Silly Question No.1 : What's the difference between convertible warrant & a convertible debenture?

Silly Question No. 2: How would you look at the current rights issue of Tata Coffee (record date 30th Oct)? The Company proposes to issue 62,34,352; 7% Partly Convertible Debentures (PCDs) in the ratio of 1 PCD for every 2 existing equity shares held as on a record date. Each PCD would have a face value of Rs 400/- and will comprise of two parts:
Part A of Rs 250/- would be converted into one fully paid Equity Share of Rs 10/- on allotment. Part B of Rs 150/- would be non-convertible and would be redeemed in equal installments of Rs 50/- each at the end of 4th, 5th & 6th years from the date of allotment. The non-convertible portion will carry a coupon rate of 7% p.a.

Silly Question No. 3 : One http://www.theequitydesk.com/forum/forum_posts.asp?TID=359 - Mungerilal is very very excited after reading your discourse on warrants. Upon finding that he could not get any good ones from the market, he has joined one underworld gang...he says that at least he will be issued a police warrant. Is he right in this approach?

Awaiting your valued response!

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Life can only be understood backwards—but it must be lived forwards

Replies:

Posted By: basant
Date Posted: 23/Oct/2006 at 2:25pm

What's the difference between convertible warrant & a convertible debenture? - SAME

Coffee prices should go higher over the next few years and it would make sense to

a) apply in the rights

b) Sell the NCD portion in the market after listing in case it is traded

c) Buy more Tata coffee with that money

I have another interesting logic to this. If we hold a NCD for 4-6 years we are betting that the company will not go broke. Now financially the payoff for equity will happen after the non secured bond holders are cleared off.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: basant
Date Posted: 23/Oct/2006 at 2:26pm

So for us to assume that there would just be enough in the company to pay off the interest and debt and then have nothing for the shareholders is like keeping the odds a bit too high.

Moreover the stock in 5 years should better as long as the company's RoE is more then the cost of capital (interest on debt).

Last year when Trent came out with such a structure (One bond of Rs 900 was converted ointo one share of Rs 400 and one bond of Rs 500) I sold off the Rs 500 bond for Rs 410 and bought Trent stock at Rs 650 in about a year I have recovered that capital loss on sale of debenture and also made such additional money.

For a risk taking investor it makes sense to sell the bond and buy equity because the bond will be serviced out of equity.

Mungerilal seems to be on the right track He would do less financial damage behind bars then outside.