WEBVTT 1 00:00:07.920 --> 00:00:12.630 Hello and welcome to this Vidcast which will reveal a very specific 2 00:00:12.930 --> 00:00:16.790 hybrid financing. Realize for the benefit of Nordex, 3 00:00:17.150 --> 00:00:21.830 a company in which produces wind turbines in the renewable 4 00:00:22.290 --> 00:00:26.950 energy industry. A few weeks ago, about months ago, 5 00:00:27.160 --> 00:00:29.390 April the fifth, 2023, 6 00:00:29.530 --> 00:00:34.070 the company is announcing the successful placement of a convertible bond, 7 00:00:34.550 --> 00:00:36.630 a bond which is convertible into shares. 8 00:00:37.050 --> 00:00:41.670 The company will collect 333 million euros 9 00:00:42.060 --> 00:00:42.893 cash, 10 00:00:43.330 --> 00:00:47.870 but the company also announced the waiver of preemptive subscription, 11 00:00:48.240 --> 00:00:51.150 right? What does it mean psr? 12 00:00:51.980 --> 00:00:56.910 Imagine you are the shareholder of a company and you hold about 10% of the 13 00:00:56.910 --> 00:01:01.150 shares if there is a rights issue. If there is a shares issue, 14 00:01:01.450 --> 00:01:06.430 you must be proposed 10% of the new shares so that if you exercise 15 00:01:06.430 --> 00:01:08.110 your subscription right, 16 00:01:08.370 --> 00:01:12.630 you will still have 10% of the voting rights after the issue. 17 00:01:13.530 --> 00:01:18.030 If you ask the existing shareholders to abandon their preemptive 18 00:01:18.030 --> 00:01:19.230 subscription rights, 19 00:01:19.330 --> 00:01:23.070 it has to be accepted by a majority of two-thirds of the voting right? 20 00:01:23.330 --> 00:01:25.670 In an extraordinary shareholder meeting, 21 00:01:26.730 --> 00:01:31.390 but then you are going to set to the shareholders you are going to be diluted. 22 00:01:31.970 --> 00:01:32.830 In addition to that, 23 00:01:33.220 --> 00:01:37.710 this convertible bond is sold through a private placement. 24 00:01:38.730 --> 00:01:43.190 No prospectus is going to be published and we have some limited 25 00:01:43.460 --> 00:01:47.110 information about what is inside. What about the industry? 26 00:01:47.250 --> 00:01:51.590 Nordex is operating in its wind turbines, winter turbines, 27 00:01:51.700 --> 00:01:54.870 equipment manufacturers. This is the industry of the company. 28 00:01:54.940 --> 00:01:56.270 What are the main actors? 29 00:01:56.270 --> 00:01:59.990 Number one is a Danish company whose name is Vestas. 30 00:02:00.330 --> 00:02:04.750 The revenues generated by the company in 2022 were about 15 billion 31 00:02:05.280 --> 00:02:10.070 Euros following number two, three, et cetera. 32 00:02:11.110 --> 00:02:15.550 Spanish, Siemens is German and Gaza is controlled by Siemens. 33 00:02:15.860 --> 00:02:19.350 They are merging then Goldwin in China. 34 00:02:19.380 --> 00:02:23.270 Goldwin is not only an equipment manufacturer, it's also an operator. 35 00:02:23.340 --> 00:02:28.110 This is why the balance sheet is a bit bigger and the company has experienced 36 00:02:28.110 --> 00:02:30.870 some capital intensity in its development. 37 00:02:30.900 --> 00:02:35.110 It's a Chinese company and it's progressively becoming the number one. 38 00:02:35.940 --> 00:02:40.830 General electric in the United States is also a very strong historical player. 39 00:02:40.830 --> 00:02:44.790 General Electric electricity is in the name of the company. 40 00:02:45.250 --> 00:02:48.110 Nordex in Germany is number eight. 41 00:02:48.530 --> 00:02:53.030 In this tuition though, reasonably big but not very big. 42 00:02:54.130 --> 00:02:58.630 Now times are quite difficult for these companies because there is some 43 00:02:58.630 --> 00:03:01.920 inflation and because there is a war in Ukraine, 44 00:03:02.780 --> 00:03:05.960 the war has contributed also to inflation by the way, 45 00:03:05.960 --> 00:03:08.120 and there's a strong correlation between these two. 46 00:03:08.350 --> 00:03:12.920 Then companies are experiencing increasing their costs but costs 47 00:03:13.460 --> 00:03:16.240 on the production. On existing contract, 48 00:03:16.500 --> 00:03:19.000 you can pass your cost to your customers, 49 00:03:19.500 --> 00:03:22.920 but it'll be maybe the case with the new contracts, 50 00:03:22.940 --> 00:03:26.120 not with the existing contracts. In addition to that, 51 00:03:26.120 --> 00:03:30.000 there are some difficulties as everybody knows in supply chain, 52 00:03:30.870 --> 00:03:35.320 then you are going to deliver your turbines with a delay, 53 00:03:35.420 --> 00:03:38.080 you are going to pay late penalties. 54 00:03:38.820 --> 00:03:40.960 So the p and l is negatively impacted, 55 00:03:41.060 --> 00:03:43.080 not only because there is an increase in the cost, 56 00:03:43.420 --> 00:03:45.640 but because you also have to pay the penalties. 57 00:03:46.280 --> 00:03:50.440 Revenues are down because of late delivery results. 58 00:03:50.870 --> 00:03:55.840 Profits are close to zero because of costs and penalties and when 59 00:03:55.840 --> 00:04:00.240 you make no profit and you still have to invest in industrial investment and 60 00:04:00.240 --> 00:04:02.760 build up your invent inventories, debt is up. 61 00:04:02.820 --> 00:04:07.480 So you understand that these three KPIs are not in the right direction. 62 00:04:08.260 --> 00:04:13.120 Now a financial analyst of Hssbc seated by the financial Times 63 00:04:13.760 --> 00:04:16.760 recently, so the situation is clearly difficult, 64 00:04:17.060 --> 00:04:20.120 but it is also in my opinion, clearly temporary. 65 00:04:20.610 --> 00:04:25.120 There will be an improvement which is going to be expected in 2024 66 00:04:25.670 --> 00:04:30.640 when the new contracts including the new situations in terms of cost 67 00:04:30.820 --> 00:04:34.560 and supply chain are going to be realized by the company. 68 00:04:35.070 --> 00:04:38.440 It's going to be 20, 24, maybe 2025, 69 00:04:38.580 --> 00:04:41.640 but the sun will shine again. In the meantime, 70 00:04:41.900 --> 00:04:46.480 you have to survive and you have to cope with this very difficult situation. 71 00:04:47.310 --> 00:04:49.280 What about Nordex in 2022? 72 00:04:49.400 --> 00:04:53.000 Revenues are 5.4 billion euros, 73 00:04:53.100 --> 00:04:57.000 so it's one third of their largest manufacturer Vestas. 74 00:04:57.900 --> 00:04:59.560 The profit is definitely a loss. 75 00:04:59.580 --> 00:05:04.560 The cash operating profit Abida Wellknown Abida is negative by 76 00:05:04.560 --> 00:05:06.000 244 million. 77 00:05:06.930 --> 00:05:09.800 Abida is cash operating loss in this case, 78 00:05:09.820 --> 00:05:14.640 so you consume cash net earnings are a bit minus depreciation and 79 00:05:14.640 --> 00:05:17.840 modernization minus interest expense, which is not big, 80 00:05:18.250 --> 00:05:23.160 which is a result of a very conservative financial strategy and you don't pay 81 00:05:23.160 --> 00:05:23.870 much tax. 82 00:05:23.870 --> 00:05:28.560 This is why the net earnings are negative by 500 million 83 00:05:28.780 --> 00:05:32.040 and the free cash flow is also negative by 500 million. 84 00:05:32.380 --> 00:05:37.200 So you understand that 2022 was a difficulty error and you consume a lot of 85 00:05:37.430 --> 00:05:39.640 cash. In addition to that, 86 00:05:39.700 --> 00:05:44.480 the company had beginning of February, 2023 to repair high 87 00:05:44.530 --> 00:05:45.280 yield bond, 88 00:05:45.280 --> 00:05:50.080 which had been issued five years before for 275 million. 89 00:05:51.310 --> 00:05:52.920 What about 2023? 90 00:05:52.920 --> 00:05:57.800 The company announced that the bid there should be between minus 2% and 91 00:05:57.950 --> 00:06:00.280 plus 3% of revenues, 92 00:06:00.420 --> 00:06:05.360 though E B D will be at break even if you make no cash with the E bid D and you 93 00:06:05.360 --> 00:06:09.280 still have to consume capital expenditures and you have to repair the high yield 94 00:06:09.280 --> 00:06:11.120 debt of 275 million. 95 00:06:11.500 --> 00:06:15.880 You understand that you are today in the net cash positive 96 00:06:15.950 --> 00:06:19.280 situation because of the conservative financial strategy, 97 00:06:19.940 --> 00:06:24.400 but it's down and you will have a liquidity problem in 2023. 98 00:06:24.700 --> 00:06:28.520 You will need cash. When you need cash, 99 00:06:29.140 --> 00:06:33.320 you need a financing strategy. You remember what a balance sheet looks like. 100 00:06:34.100 --> 00:06:37.240 You have two layers of financial resources, 101 00:06:37.480 --> 00:06:39.800 shareholders and financial creators, 102 00:06:39.800 --> 00:06:44.120 so you can issue bonds or straight debt or you can issue shares 103 00:06:44.780 --> 00:06:48.000 or you can issue something which is in between. 104 00:06:48.150 --> 00:06:52.480 This is why it's named sometimes meds and in financing it's named hybrid 105 00:06:52.850 --> 00:06:57.840 securities and the bonds convertible into shares is a perfect example 106 00:06:57.900 --> 00:07:02.760 of that as their name is suggesting. These are straight bonds, 107 00:07:02.900 --> 00:07:06.680 but with the option to convert the bonds into shares at maturity. 108 00:07:07.710 --> 00:07:12.080 There's an extensive academic literature on how to evaluate 109 00:07:12.110 --> 00:07:16.880 convertible bonds because it's about actuarial calculation to evaluate the bond 110 00:07:17.260 --> 00:07:21.360 and it's about option valuation to evaluate the right to convert, 111 00:07:22.060 --> 00:07:24.920 but there is a very interesting contribution from two gentlemen, Mr. 112 00:07:25.020 --> 00:07:28.760 Meyers and Mr. Melo, which is named the picking order. 113 00:07:29.300 --> 00:07:33.720 The picking order describes how the company's going to select one after the 114 00:07:33.720 --> 00:07:34.180 other, 115 00:07:34.180 --> 00:07:39.160 the financial resources it has to mobilize in order to finance its gross or 116 00:07:39.700 --> 00:07:42.560 its losses. Myers, if you remember, 117 00:07:42.700 --> 00:07:47.640 is a gentleman who produced an absolutely outstanding article in 118 00:07:48.000 --> 00:07:52.720 1977 whose name was determinants of corporate borrowings and Myers was 119 00:07:52.720 --> 00:07:56.120 nicely demonstrating that if a company is under leverage, 120 00:07:56.430 --> 00:08:01.120 then the company has the opportunity to mobilize its financial flexibility to 121 00:08:01.120 --> 00:08:05.720 make value creating investments when these investments are quite 122 00:08:05.930 --> 00:08:10.720 risky for the company. This is simply the invention of real options. 123 00:08:11.180 --> 00:08:15.600 Mr. Myers is an outstanding professor together with Mylo. 124 00:08:15.600 --> 00:08:16.440 What do they conclude? 125 00:08:16.440 --> 00:08:20.280 They say the first financial resource you are going to mobilize is cash, 126 00:08:20.350 --> 00:08:23.320 cash at bank cash, which is available in the company. 127 00:08:23.750 --> 00:08:27.960 It's quite simple to mobilize cash. Once you don't have cash anymore, 128 00:08:28.220 --> 00:08:32.480 you visit the banker and you are going to issue straight debt. 129 00:08:32.830 --> 00:08:35.920 It's going to be bank debt. If it stays in the balance sheet of the bank, 130 00:08:36.470 --> 00:08:41.040 it's going to be a bond if it is sold to investors, pension funds and the likes. 131 00:08:41.630 --> 00:08:45.640 Basically what is at stake when you issue straight debt? 132 00:08:45.940 --> 00:08:49.800 The probability of the default. If you're an investor and if you buy a bond, 133 00:08:50.300 --> 00:08:54.560 if you're a banker and if you lend money to a company, what is at stake? 134 00:08:55.100 --> 00:08:59.360 The probability that the company cannot pay the coupon cannot pay the interest 135 00:08:59.360 --> 00:09:01.000 cannot repay the loan. 136 00:09:01.700 --> 00:09:06.640 So in order to convince the bankers and the bond holders to provide funds, 137 00:09:06.860 --> 00:09:10.800 you just have to tell them that the probability of default is extremely 138 00:09:10.890 --> 00:09:15.880 negligible. This is not very hard stuff for a company. Generally speaking, 139 00:09:16.290 --> 00:09:20.600 let's directly jump to step four. You can issue shares, 140 00:09:20.980 --> 00:09:25.960 but if you issue shares as a threat that the shareholders are diluted except 141 00:09:26.020 --> 00:09:29.000 if they exercise their preemptive right, 142 00:09:29.780 --> 00:09:34.680 but when they abandon the preemptive right forced by a vote, uh, 143 00:09:34.680 --> 00:09:37.880 they are going to be diluted. That's one point. 144 00:09:37.880 --> 00:09:41.120 The second point is what is at stake for the investor? 145 00:09:41.340 --> 00:09:43.920 Is a stock price going to increase a lot or not? 146 00:09:44.590 --> 00:09:48.200 It's not just simply demonstrating that the priority of default is negligible. 147 00:09:48.200 --> 00:09:51.240 It's about the business plan. It's about the business model of the company. 148 00:09:51.300 --> 00:09:54.520 Do you have the right strategy and quality of execution? 149 00:09:54.780 --> 00:09:58.480 So it's much more difficult to convince the shareholders rather than the 150 00:09:58.590 --> 00:10:02.480 bankers. This is what is at stake with the peck order theory. 151 00:10:02.900 --> 00:10:06.680 Now there is something in between. Between two and four. You have three, 152 00:10:06.820 --> 00:10:09.800 and level three is about hybrid securities, 153 00:10:10.500 --> 00:10:14.440 so a convertible bond is a little bit level two, a debt, a little bit. 154 00:10:14.440 --> 00:10:15.273 Level four, 155 00:10:15.420 --> 00:10:19.480 you have the right to convert and transform your bonds into shares. 156 00:10:19.980 --> 00:10:23.000 Let me briefly go through the characteristics of a convertible bond. 157 00:10:23.450 --> 00:10:26.920 Let's imagine that the company stock price is currently 80 euros. 158 00:10:27.340 --> 00:10:31.040 You're going to issue say bonds at a nominal value, 159 00:10:31.040 --> 00:10:35.400 which is 100 necessarily more than 80 160 00:10:35.810 --> 00:10:37.840 euros. I will tell you why in a minute. 161 00:10:38.550 --> 00:10:42.240 Imagine that you want to raise 21 million euros. 162 00:10:42.710 --> 00:10:45.240 Then if you issue at 100 per bond, 163 00:10:45.460 --> 00:10:49.720 you have to issue 210,000 bonds, 164 00:10:50.010 --> 00:10:54.920 which multiplied by 100 gives you the 21 million euros you were expecting. 165 00:10:55.900 --> 00:10:58.680 Now attached to the bond, there is a conversion rate. 166 00:10:59.220 --> 00:11:03.360 You have the right to convert one bond into one share. 167 00:11:03.980 --> 00:11:04.920 You have the right, 168 00:11:05.120 --> 00:11:08.240 but you don't have the obligation when you have the right and not the obligation 169 00:11:08.240 --> 00:11:12.440 to do something, buy or sell an asset. It's not an option's, 170 00:11:12.440 --> 00:11:15.560 a call or put option. The duration, 171 00:11:15.580 --> 00:11:20.200 the maturity of the bond is going to be 10 years and the coupon is going to be 172 00:11:20.200 --> 00:11:24.840 lower than the coupon which would get uh, be the bond, 173 00:11:24.940 --> 00:11:29.040 be a straight bond, it would be 5%. For example, 174 00:11:29.300 --> 00:11:30.720 if it was a straight bond, 175 00:11:31.020 --> 00:11:35.880 now you pay only 4% to the bond holder because they have to pay for 176 00:11:35.880 --> 00:11:36.920 the conversion. Right? 177 00:11:37.860 --> 00:11:41.360 Now you understand why the nominal should be greater than the stock price. 178 00:11:42.030 --> 00:11:45.840 Imagine that the bond had been issued at a nominal of 70 euros. 179 00:11:45.840 --> 00:11:49.200 When the stock price is 80, you are a rational investor. 180 00:11:49.270 --> 00:11:52.240 What you're going to do, you buy the convertible bond for 70, 181 00:11:52.780 --> 00:11:57.760 you convert into shares and then you sell the share for 80 and you make 182 00:11:57.800 --> 00:11:59.400 a free lunch of 10 year house. 183 00:11:59.970 --> 00:12:04.640 Definitely the nominal should be significantly greater than the stock 184 00:12:04.650 --> 00:12:08.720 price. There are plenty of benefits for the issuer. 185 00:12:09.100 --> 00:12:11.480 On the one hand, the investor on the other hand, 186 00:12:12.170 --> 00:12:14.000 first let's start with the issuer. 187 00:12:14.580 --> 00:12:19.080 You need 21 million euros. Imagine that you issue shares. 188 00:12:19.470 --> 00:12:23.320 Today's stock price is 80 the day you want to issue shares, 189 00:12:23.320 --> 00:12:25.920 you have to offer a kind of discount to attract the investors. 190 00:12:25.930 --> 00:12:30.760 Maybe you are going to issue your shares at 70 euro. Now, 191 00:12:30.860 --> 00:12:33.120 if you need 21 million euros, 192 00:12:33.120 --> 00:12:37.840 you need to create 21 million euros divided by 70 193 00:12:38.130 --> 00:12:43.080 euros per share, which is 300,000 shares. As a conclusion, 194 00:12:43.140 --> 00:12:48.120 if you create shares, you create immediately 300,000 shares. 195 00:12:48.860 --> 00:12:52.600 So immediately 300,000 voting rights. 196 00:12:53.940 --> 00:12:56.320 If you decide to issue convertible bonds, 197 00:12:56.820 --> 00:13:01.400 the convertible bonds are not going to be converted immediately and you issue 198 00:13:01.400 --> 00:13:05.880 only 210,000 bonds which are going to be transformed. 199 00:13:05.900 --> 00:13:10.720 If everything goes right into 210,000 shares 200 00:13:10.740 --> 00:13:13.800 and voting rights later on in 10 years, 201 00:13:15.230 --> 00:13:19.800 then the question is why In 10 years the answer is first 202 00:13:20.300 --> 00:13:25.240 in some years time because today the rationality is not to convert. 203 00:13:25.260 --> 00:13:28.320 If the stock price is lower than 100 euros, 204 00:13:28.320 --> 00:13:30.680 it would be absolutely stupid decision, 205 00:13:31.140 --> 00:13:33.520 but currently stock price is 80 euros, 206 00:13:33.520 --> 00:13:38.080 so it's going to take some time before it goes up from 80 euros to 207 00:13:38.190 --> 00:13:41.360 significantly more than 100. That's one point. 208 00:13:41.380 --> 00:13:46.320 The second point is even stronger it a convertible bond is 209 00:13:46.320 --> 00:13:49.080 a combination of a bond and an option. 210 00:13:50.020 --> 00:13:53.840 Do you exercise a core option before maturity? The answer is no, 211 00:13:54.310 --> 00:13:56.080 because when you exercise an option, 212 00:13:56.100 --> 00:13:59.200 you cash in the intrinsic value of the option, 213 00:13:59.660 --> 00:14:02.360 but you destroy the time value of the option. 214 00:14:02.620 --> 00:14:07.520 So today you consider that it's a right moment to take the money out of your 215 00:14:07.520 --> 00:14:08.353 investment. 216 00:14:08.420 --> 00:14:12.800 You don't exercise the convertible bond to transform it into shares. 217 00:14:12.900 --> 00:14:17.480 You sell the convertible bond and then you cash in not only the intrinsic value, 218 00:14:17.700 --> 00:14:20.080 but you also cash in the time value. 219 00:14:20.460 --> 00:14:25.200 So as long as there is any time value, so very close to 10 years time, 220 00:14:25.670 --> 00:14:30.120 what do you do? You sell the bond but you don't convert it. 221 00:14:30.820 --> 00:14:35.480 So you understand that the delusion is significantly reduced 210,000 222 00:14:35.660 --> 00:14:39.240 as opposed to 300,000 and it's very much delayed, 223 00:14:39.530 --> 00:14:43.280 which is quite good for the issuer. Last but not least, 224 00:14:44.020 --> 00:14:47.200 as the investors, they have to pay for the cooler option. 225 00:14:47.310 --> 00:14:51.640 They have to pay a premium. They are going to accept a lower interest rate. 226 00:14:51.860 --> 00:14:56.040 As they accept a lower rate, you are going to lower your financial cost, 227 00:14:56.260 --> 00:15:00.840 so this is absolutely great for the issuer as far as the investor is 228 00:15:00.840 --> 00:15:01.673 concerned, 229 00:15:01.790 --> 00:15:06.320 this is also a very relevant instrument because if the investor is speculating 230 00:15:06.420 --> 00:15:09.480 on the upside, it's a perfect instrument. 231 00:15:10.300 --> 00:15:14.680 Now you anticipate that the share price will significantly exceed 100 232 00:15:15.010 --> 00:15:19.080 euros in the future so that it pays not only the nominal of the convertible boat 233 00:15:19.100 --> 00:15:21.440 but also the difference in the interest rate. 234 00:15:21.660 --> 00:15:25.040 You remember the 5% as opposed to the 4% in the future. 235 00:15:25.460 --> 00:15:27.240 So you are speculating on the upside, 236 00:15:27.540 --> 00:15:30.600 but the speculation is based on forecasts and convictions. 237 00:15:30.600 --> 00:15:34.040 Maybe you are going to be wrong and then if it goes down, 238 00:15:34.100 --> 00:15:39.040 you have a kind of parachute which you can open just in case the stock price is 239 00:15:39.040 --> 00:15:39.873 down. 240 00:15:39.900 --> 00:15:44.800 And then if the stock price does not reach 100 at maturity, 241 00:15:44.870 --> 00:15:46.480 what do you do? You don't convert. 242 00:15:46.740 --> 00:15:51.720 You ask for the repayment of the nominal and this is a minimum you are 243 00:15:51.720 --> 00:15:55.880 going to get. Sometimes there is a hole in parachute take care, 244 00:15:56.460 --> 00:16:00.120 but let's move on with a convertible bond closes. 245 00:16:00.390 --> 00:16:02.440 Sometimes you'll read in comfortable bonds, 246 00:16:03.000 --> 00:16:06.240 a close which is named the early redemption close, 247 00:16:07.540 --> 00:16:10.800 and very often it says it's a case for nordex. By the way, 248 00:16:11.270 --> 00:16:14.280 that is the store price during a significant period of time, 249 00:16:14.300 --> 00:16:18.720 at least one month exceeds 130% of the nominal. 250 00:16:19.470 --> 00:16:21.800 Then the issuer, the company nordex, 251 00:16:21.900 --> 00:16:26.040 has a right to exercise an early redemption. 252 00:16:26.060 --> 00:16:28.400 So the company tells you, you know what guys? 253 00:16:28.420 --> 00:16:33.160 You have two months to decide if you get your money back or if you convert. 254 00:16:33.830 --> 00:16:37.360 Obviously if the stock price is for example 150, 255 00:16:38.100 --> 00:16:42.840 you are going to say I prefer 150 rather than receiving 100, and what do you do? 256 00:16:42.980 --> 00:16:43.813 You convert. 257 00:16:44.070 --> 00:16:48.720 This is why the early redemption clause is also very often named by 258 00:16:48.720 --> 00:16:52.280 academics and practitioners, the forced conversion clause. 259 00:16:53.020 --> 00:16:57.800 So you understand that in such a case you limit the return for the investors. 260 00:16:58.440 --> 00:17:01.400 I told you that you don't exercise an option before maturity, 261 00:17:02.060 --> 00:17:06.480 but then you force people to exercise so you destroy the time value of the 262 00:17:06.480 --> 00:17:07.313 option. 263 00:17:07.940 --> 00:17:12.760 Of course you can say that if the stock price is very significantly beyond 264 00:17:12.820 --> 00:17:13.653 the nominal, 265 00:17:13.950 --> 00:17:17.880 then the probability of non-con conversion is low and the probability of 266 00:17:17.880 --> 00:17:22.240 conversion or non-con conversion is reflected in the time value of the option. 267 00:17:22.240 --> 00:17:24.880 So the time value of the option is going to be very limited, 268 00:17:25.420 --> 00:17:28.040 but still you limit the return for the investors. 269 00:17:29.230 --> 00:17:32.840 Another point is what happens if the carbon is not doing well? 270 00:17:32.860 --> 00:17:34.400 Of course you don't convert, 271 00:17:34.900 --> 00:17:39.440 but I told you that there's a hole in the parachute because if the company stock 272 00:17:39.440 --> 00:17:40.560 price is not 100, 273 00:17:41.310 --> 00:17:45.520 it's maybe 80 or it's maybe very much down 20 for example, 274 00:17:45.910 --> 00:17:46.600 what does it mean? 275 00:17:46.600 --> 00:17:51.400 It means that the company is in an extremely difficult situation and then 276 00:17:51.400 --> 00:17:55.640 maybe it cannot repay the 100 euros of nominal. 277 00:17:56.110 --> 00:18:00.480 This is why quite often there is also a close in the convertible bond issues, 278 00:18:00.480 --> 00:18:02.240 which is the issuer. 279 00:18:02.260 --> 00:18:07.120 The company nordex have the right to repay if the conversion 280 00:18:07.320 --> 00:18:10.720 is not exercised in cash or insecurities, 281 00:18:11.210 --> 00:18:15.920 which basically means that it is the the decision of the issuer to give you 282 00:18:16.100 --> 00:18:20.560 100 euro back or if the stock price is 25 283 00:18:20.780 --> 00:18:23.640 stocks against the 100 euro cash, 284 00:18:23.930 --> 00:18:28.920 which is not fully appreciated by the investors as you can imagine. Now, 285 00:18:28.920 --> 00:18:33.600 let's apply all these concepts to the convertible bond issue by Nordex a few 286 00:18:33.600 --> 00:18:36.920 weeks ago. When the issue is closed on the 5th of April, 287 00:18:37.100 --> 00:18:41.040 the stock price is 12 point 10 euros per share. 288 00:18:41.460 --> 00:18:45.800 Now the company has a possibility to issue convertible bonds at more than 289 00:18:45.800 --> 00:18:49.200 12, 14, 15, 16, 17. No, 290 00:18:49.200 --> 00:18:52.440 the nool is going to be 100,000 euros. 291 00:18:52.440 --> 00:18:57.000 So you understand that it's not for their traditional and small shareholder. 292 00:18:58.180 --> 00:19:00.880 The calculator reference stock price, 293 00:19:00.880 --> 00:19:05.120 which is 15.73 euros and they say it is exactly 294 00:19:05.260 --> 00:19:10.080 130% of the stock price Z DESI issue is closed. 295 00:19:10.700 --> 00:19:15.200 So 130% of 12 point 10 is 15.73. 296 00:19:15.230 --> 00:19:18.600 This reference point is going to be very useful to calculate the conversion 297 00:19:18.630 --> 00:19:19.463 rate. 298 00:19:19.860 --> 00:19:24.760 The company issues bonds at the nominal of 100,000 299 00:19:25.370 --> 00:19:28.200 euros. Now what about the conversion rate? 300 00:19:28.310 --> 00:19:32.920 It's going to be a rate which justifies conversion 301 00:19:33.420 --> 00:19:37.840 if the stock price goes beyond 15.73 euros. 302 00:19:38.860 --> 00:19:43.840 So basically you divide 100,000 by 15.73 euros 303 00:19:44.060 --> 00:19:48.800 per share and you get 6,357 shares. 304 00:19:48.800 --> 00:19:51.920 So you have the right to convert your bond. Of course, 305 00:19:51.920 --> 00:19:56.880 you're going to exercise the right of converting your bonds into shares 306 00:19:57.340 --> 00:20:02.320 if the stock price goes beyond 15 point 73 euros per 307 00:20:02.320 --> 00:20:07.280 share, which is exactly 30% more than the current stock 308 00:20:07.280 --> 00:20:11.560 price. This is the mechanics of it duration, quite short, 309 00:20:11.670 --> 00:20:14.160 five euros. You remember what I said? 310 00:20:14.570 --> 00:20:18.040 Seven 10 euro very often because it's our long-term debt. 311 00:20:18.940 --> 00:20:22.880 Now what about the coupon? The coupon is going to be 4.25%. 312 00:20:23.500 --> 00:20:28.400 It should be compared with a straight bond coupon the company would 313 00:20:28.400 --> 00:20:31.440 offered and unfortunately we don't have the value, 314 00:20:31.580 --> 00:20:34.960 so it's a bit difficult to assess the premium of the option. 315 00:20:35.700 --> 00:20:38.920 So these are the characteristics of this convertible bond. 316 00:20:39.820 --> 00:20:43.560 You are an investor, you speculate on the upside. 317 00:20:44.500 --> 00:20:45.880 In order to convince the investors, 318 00:20:46.060 --> 00:20:49.240 you have to tell them that you are very optimistic about the future. 319 00:20:49.700 --> 00:20:52.520 You look at the past and you look at the last two years, 320 00:20:53.030 --> 00:20:57.160 what happened on the funk fort stock market? The dax, 321 00:20:57.740 --> 00:21:01.840 the Daks during the last two years was quite stable during about six months, 322 00:21:02.390 --> 00:21:04.960 then went down and then went up. 323 00:21:05.700 --> 00:21:10.400 So today it's roughly at the same level as two years ago what happened to 324 00:21:10.430 --> 00:21:13.240 Nord X. When the DAX was stable, 325 00:21:13.620 --> 00:21:16.560 Nordex stock price dramatically went down. 326 00:21:17.430 --> 00:21:20.840 Then when there was a little bit of recovery on the dax, 327 00:21:20.980 --> 00:21:25.760 the company stock price went up overreacting to what was happening in the stock 328 00:21:25.760 --> 00:21:29.440 market, which means that the beta of the company is very high, 329 00:21:30.320 --> 00:21:33.520 probably close to two. Then it went sharply down. 330 00:21:33.900 --> 00:21:38.080 It recovered together with the Dax, again overreacting, 331 00:21:38.380 --> 00:21:42.640 and then while the DAX was up nor D was down. Why? 332 00:21:43.310 --> 00:21:47.840 Because the situation is quite difficult for the industry and then 333 00:21:48.310 --> 00:21:53.280 when the DAX was quite stable from two years ago to today, 334 00:21:53.280 --> 00:21:56.480 even though there were some fluctuations in the meantime, 335 00:21:56.700 --> 00:22:00.440 no Dex was dividing its stock price by two in two euro. 336 00:22:01.100 --> 00:22:05.480 So you understand that it's not great to sell to the investors that there is a 337 00:22:05.480 --> 00:22:10.440 fantastic upside potential because today it's down because the market 338 00:22:10.580 --> 00:22:15.040 is absolutely convinced that it's going to be a very difficult period and maybe 339 00:22:15.220 --> 00:22:18.640 if the stock price is going to temporary drop, 340 00:22:19.180 --> 00:22:22.320 what's going to happen in the future is a little bit of question mark. 341 00:22:22.980 --> 00:22:23.580 By the way, 342 00:22:23.580 --> 00:22:28.360 the company is absolutely convinced that it's going to drop and the drop is 343 00:22:28.960 --> 00:22:33.720 realized though, in order to source this dilemma, Nordex has a great idea. 344 00:22:34.370 --> 00:22:38.800 There is a majority shareholder at Nordex and the 345 00:22:39.200 --> 00:22:44.120 investor is going to lend securities to the investors which are 346 00:22:44.120 --> 00:22:46.240 going to invest in the convertible bond. 347 00:22:47.060 --> 00:22:51.400 You remember that the stock price is 12 point 10 on the 5th of April. 348 00:22:52.180 --> 00:22:55.960 At the same moment as the convertible bond is issued, the investors, 349 00:22:56.030 --> 00:22:58.960 they receive shares they don't buy. 350 00:22:59.510 --> 00:23:03.760 They borrow shares at 12 point 10 to do what? 351 00:23:04.010 --> 00:23:08.080 Short selling. So you sell the share which you borrowed, 352 00:23:08.620 --> 00:23:13.520 hoping that the stock price is going to go down so that you can buy bags of 353 00:23:13.520 --> 00:23:14.080 shares. 354 00:23:14.080 --> 00:23:18.920 A little bit later you make a profit and you'll give the share back to 355 00:23:19.260 --> 00:23:23.840 the previous owner of the share. So it's a speculation downward. 356 00:23:24.140 --> 00:23:27.080 You anticipate that the stock price is going to go down. 357 00:23:28.020 --> 00:23:31.000 If you are right in your speculation, what's going to happen? 358 00:23:31.140 --> 00:23:35.600 The value of the convertible bond is going to be down because the probabilities 359 00:23:35.600 --> 00:23:37.680 that you convert is going to be lower, 360 00:23:38.740 --> 00:23:42.480 so you are going to compensate the short term losses you are going to generate 361 00:23:42.550 --> 00:23:47.520 with a convertible bone with the profit you are going to make short 362 00:23:47.630 --> 00:23:52.560 selling the shares which you borrowed from the majority shareholder 363 00:23:52.700 --> 00:23:55.880 of the company. That's quite strange, but it worked. 364 00:23:56.780 --> 00:24:01.040 If you observe the evolution of the stock prize the last months from the 365 00:24:01.040 --> 00:24:04.040 5th of April to today, when I recall this, 366 00:24:05.330 --> 00:24:09.400 there were real losses. The current stock price is 10.5, 367 00:24:10.100 --> 00:24:15.040 and so you understand that there was a loss of 1.6 for the shareholder, 368 00:24:15.340 --> 00:24:19.760 but for the short seller it was a capital gain of 1.6 369 00:24:20.090 --> 00:24:20.820 euros. 370 00:24:20.820 --> 00:24:25.800 And you understand that this capital gain is a kind of hedging against the 371 00:24:25.910 --> 00:24:29.080 evolution of the value of the convertible bond. 372 00:24:30.140 --> 00:24:33.160 That's very clever, but that's very strange message. 373 00:24:34.300 --> 00:24:38.680 You could argue why not is your traditional bond if you need money. 374 00:24:39.780 --> 00:24:41.200 The high yield debt, 375 00:24:41.200 --> 00:24:45.400 which was re repaired at the beginning of February, 2023 was issued in 376 00:24:45.400 --> 00:24:50.400 2018. The coupon was 6.5%. 377 00:24:50.980 --> 00:24:55.240 Why don't you accept or replace this high yield debt by a traditional 378 00:24:55.920 --> 00:25:00.720 straight bond? Why don't you wait? If you can't wait, 379 00:25:00.900 --> 00:25:05.240 it might be interpreted and the fact that there is a kind of emergency, 380 00:25:05.410 --> 00:25:09.440 there is urgency. So it's an emergency measure to make this issue. 381 00:25:10.580 --> 00:25:12.800 But if it's kind of emergency, 382 00:25:12.860 --> 00:25:15.880 it means that maybe there is a liquidity risk. 383 00:25:16.210 --> 00:25:21.000 Maybe you are afraid of not being able to attract investors in the near future. 384 00:25:21.370 --> 00:25:25.240 Maybe you are afraid that it might be a downgrading of your rating. 385 00:25:26.410 --> 00:25:28.840 These are negative messages, 386 00:25:29.660 --> 00:25:32.800 so you understand that there is a kind of paradox in this situation. 387 00:25:33.500 --> 00:25:34.333 On the one hand, 388 00:25:34.900 --> 00:25:39.120 you ask them to speculate on the upside and you convince them that there is an 389 00:25:39.120 --> 00:25:42.320 upside potential, but you say that there is an upside, 390 00:25:42.320 --> 00:25:44.520 which in the short run might be a downside. 391 00:25:45.540 --> 00:25:50.160 So you speculate on the downside to protect the speculation on the 392 00:25:50.160 --> 00:25:54.640 upside, which is a little bit confusing in the mind of the market. 393 00:25:56.020 --> 00:26:00.280 But the second conclusion of this VI is, in my opinion, very much an issue. 394 00:26:00.860 --> 00:26:04.640 It was a private placement, no prospectors published, 395 00:26:04.820 --> 00:26:09.240 of course a contract, but no communication on what is inside. 396 00:26:09.670 --> 00:26:14.120 Very detailed communication, no preemptive subscription, right? 397 00:26:14.340 --> 00:26:17.760 And in addition to that, a strongly negative message. 398 00:26:18.460 --> 00:26:22.400 The negative message was well understood by the market and the stock price went 399 00:26:22.470 --> 00:26:26.000 down at the expense of the minority shareholders. 400 00:26:26.820 --> 00:26:28.120 So the minority shareholders, 401 00:26:28.120 --> 00:26:33.120 they were excluded from the ability to invest in this convertible bond 402 00:26:33.620 --> 00:26:38.040 by a decision taking, an extraordinary shareholder meeting. In the meantime, 403 00:26:38.040 --> 00:26:39.280 something is happening. 404 00:26:39.280 --> 00:26:43.920 They don't receive the full communication of what is happening and they see that 405 00:26:43.980 --> 00:26:46.440 the consequence is a stock price is down. 406 00:26:47.060 --> 00:26:50.080 So the minority shareholders are very likely, 407 00:26:50.670 --> 00:26:55.390 extremely upset by this issue. Thank you very much.