The new REGI convertible bond appeared at least a few percentage points cheap at issue, even with fairly cautious inputs driven by the company’s small size and the market’s unfamiliarity with the name. With a set of cookie-cutter inputs (600 over, 35% vol), the bonds modeled about 3% cheap, but that cheapness vanished as soon as the bonds began to trade. Still, there is plenty of “play” in the assumptions. The options are not particularly liquid or long-dated, but they trade with implied volatilities in the high 40s. Even kicking the volatility assumption up to 40 leaves a couple of points of cheapness in the current price.
Despite the post-issue richening, the bond still has the optics of an old-school convertible, and there’s much to be said for that. A five-year piece of paper with a yield exceeding 2.5% and a conversion premium in the mid-30s feels the way a convertible should. Some quick upside/downside calculations suggest this bond is likely to deliver the kind of two-thirds upside/one-third downside we used to expect in most of our deals. These days, though, this is a rarity, and it adds to the appeal of the REGI convertible.Read More