drillordrop wrote:Okay, so I've spent some time looking at convertible bonds and it is quite a complex subject when one wants to value a bond, which for equity holders is not that relevant as they are only looking at things from an equity perspective obviously
The HURCONVT bond appears to be pretty much a standard issue bond. The provisions and mechanisms in it (that are publicly available) all look normal. By that I mean the provisions on indebtedness, the embedded derivative, change of control, the right of HUR to convert to cash after a certain date at an agreed calculation of value and the stipulations regarding default.
I read a detailed text on convertibles and pricing them and built spreadsheets to value them. WARNING!! DON"T TRY - unless you want to go to town on Black-Scholes and derivatives, calculating the PV of the bond component, the PV of the conversion option, expected stock volatility, credit spreads, annualised standard deviation of stock price etc. & etc.
However, there is an article discussing convertibles at a basic level at this link: https://www.gabelli.com/funds/insights/ ... 74e930eb64
I have extracted one quotes from it below for those too lazy to even bother with the link...
Distressed
When a company threatens to go into default or actually goes bankrupt, convertibles, which are senior to the common stock in the company’s capital structure, may retain significant value. Professional investors who specialize in distressed companies have often found value in these convertible issues worth investigation. On the convertible graph (Graph 1) these issues would fit on lower left near the spot marked “Distressed”
The unshot of all this is that if Lancaster is a dud and HUR goes belly-up then the bond holders will get the company but as the underlying value of the business disappears they will only have things of tangible value left to sell of which there doesn't seem to be much almost everything is leased.
So.... it seems to me that the bond is not a major risk to equity holders, indeed the bond holders seem pretty much as exposed as equity unless they managed to put a short position on to cover. I realise some posters have already all said this in summary, so apologies if I took a very long-winded and mentally arduous way to join you - but at least I now understand convertibles very well indeed!
Happy to hear others comments where I may have missed something.
i concur with the above commentary - the terms of the bond have never particularly concerned me (other than an upside constraint to equity value have the sp motored up)- all terms looked like normal stuff , but it misses the point i was making about the significance of the debt.
my point is the potential influence of the debt on the companies forward operating plan. the directors have a duty to the bondholders which can not be ignored by them. hence my view that they will very likely be seeking to have the cash to redeem the bonds on the due date as cash in the bank in good time.
imv the delay between #8 drill and tie back time - is largely cash available driven, assuming all is well with both current wells. there is clearly a time lag to impliment WOSP tiein but the farmout terms and program indicated far less than advised #8 tieback duration. this is a positive case of good cash management (assuming spirit have gone walk about as i would suggest the info available suggests). it shows hur will not let the bondholders control the show.
in the alternative, the #8 well is a replacement for the wet well. it could be accelerated and that would be taken as good news, i would suggest. to have stated that prior to wet well testing #8 would be tied back pdq would have declared an outcome i just do not think even the company knew at that time (and perhaps / likely not as i type).
hence i believe the outcome for equity is very dependent on the well flow results this month (more than any other issue), but also the bond debt liability in acting as a constraint on capex timing and hence investment case.
i maintain my view the opportunity value of the non-lancs 2C has likely gone walkabout, and fundamentals of the business EV valuation still maintain a premium to EPS npv. In other words the Mcap will not go back to reflecting opportunity value of that 2C.
i remain not long or short.