A reader of our Hybrid Vigor letter asked for an update on the Herbalife convertible this morning, with the stock breaking bad below $50 per share. The bonds are breaking bad too, having traded as low as 78.75. That makes the approximate scorecard since issuance: stock down from $69 to $49 (about 29%), convertible down a bit over 21%. That’s three quarters of the downside for an asset class that tries to deliver only about a third of the downside. Granted, this is short term.
One big problem with the bonds is that short-sellers smelling blood figure to join Bill Ackman. That will make hedging the bonds more challenging and make hedgers more dependent on the special borrow facility the company created when it issued the bonds. As an arbitrageur, you never want to be dependent on a single source of borrow. Easier to sell the bonds and move on to the next trade—if there is a bid. All the more reason for true Herbalife believers to take advantage of the favorable bond terms. In today’s convertible market, you don’t get terms like these—a yield over 7% and a premium well under 40%—on companies that will be around for the long haul. Bill Ackman can stand up and say, “Don’t listen to me, listen to the convertible bond market.”