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Convertible Debt Adjustment

In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for ... Read More

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by Guest 1.

added 11 years ago

Re: Convertible Debt Adjustment

Sorry, but I realized I have a handful of related, follow-up questions to this as well. Admittedly my understanding of convertibles is somewhat limited, which is the source of most of these questions. (4) This is related to the original question of this post: referring to the Costco 10-Q, pg 26, in... Sorry, but I realized I have a handful of related, follow-up questions to this as well. Admittedly my understanding of convertibles is somewhat limited, which is the source of most of these questions.

(4) This is related to the original question of this post: referring to the Costco 10-Q, pg 26, in the Long-Term Debt section, it clearly says that in the 1H of fiscal 2005, $266.6M of principal was converted into 9.4M shares and in 1H of 2006, $164.9M of principal was converted into 5.6M shares. I don't understand how the sum of these share totals is exceeding the max shares convertible figure of 9,430,147 stipulated in the 10-K for the 3.5% zero-coupon converts. My understand of convertibles are that there is a defined amount of shares convertible for each note/bond at a predetermined conversion price. Granted this understanding comes from interest-bearing converts with $1000 par and say 20:1 conversion ratio, i didn't think it would differ in mechanics with zero-coupon. Could you explain this?

(4b) If zero-coupon and int-bearing are different in nature, how so?

(5) As an investor, why don't we compare the current stock price of Costco to its initial conversion price of $22 (per 10-K) for conversion decision making?

(6) Also, for some reason i thought you need to buy the underlying stock from the company as part of the conversion so shouldn't cash and APIC also go up in the accounting entry, not just debt reduction and O/S increase?

(7) Lastly, let's say we were to convert based on the analysis in the 10-K. However, as Hamilton says, we shouldn't pull from differing time periods (much like the cap leases exclusion from the debt calculation). Hence, using the info we got from the 10-K to determine the conversion would be inaccurate since there should be a newer PV of principal on the books as of the 10-Q, except that they don't disclose it. In that case, what do you do? Use best available info, as of 10-K? Or disregard, as with the practice of the cap leases?

Sorry.... so many questions. Read More

by Guest 1.

added 11 years ago

Re: Convertible Debt Adjustment

1) You would adjust the S/Out by the amount that still has not been converted. We don't remember the numbers off-hand, but it would not be the entire maximum amount of shares. 2) Yes, same for all convertible securities. There's no difference in this context between preferred or debt. The differen... Read More

by WST Expert 1.

added 11 years ago

Re: Convertible Debt Adjustment

(1) & (4) Sorry! I guess the key words are "current Notes outstanding". This makes a lot more sense now. (2) (3) (4b) & (7) Thanks! (5) I think you may have missed my question 5 (you answered 4b). As an investor, why don't we compare the current stock price of Costco to its init... Read More

by Guest 1.

added 11 years ago

Re: Convertible Debt Adjustment

5) Recall, your decision is as of today, as of now. So, if you convert NOW, you get $x of stock. If you hold on right now, you get $y of principal. Generally, whichever is bigger, you do. If $y is much larger than $x, then don't convert. If $x is much larger than $y, then convert. However, if $x is... Read More

by WST Expert 1.

added 11 years ago

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