Is Convertible Hedge Transaction same as short selling?
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Are you asking convertible hedge strategy of hedge fund
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Concurrent with the offering of the 2024 Notes and 2026 Notes, the Company entered into convertible note hedge transactions with certain bank counterparties whereby the Company has the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 20.1 million shares of its common stock at a price of approximately $57.14 per share for the 2024 Notes, and a total of approximately 11.1 million shares of its common stock at a price of approximately $130.03 per share for the 2026 Notes. The total cost of the convertible note hedge transactions was $268.0 million and $213.5 million for the 2024 Notes and the 2026 Notes, respectively. In addition, the Company sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 20.1 million shares of the Company’s common stock at an initial strike price of $80.20 per share for the 2024 Notes and a total of approximately 11.1 million shares of the Company’s common stock at a price of $163.02 per share for the 2026 Notes. The Company received $186.8 million and $161.1 million in cash proceeds from the sale of these warrants in connection with the 2024 Notes and 2026 Notes offerings, respectively.
Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the 2024 Notes and 2026 Notes and to effectively increase the overall conversion price from $57.14 to $80.20 per share for the 2024 Notes and from $130.03 to $163.02 per share for the 2026 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheets as of June 30, 2022.
FYI: In 2018, the Company issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2024 (the 2024 Notes). And In 2021, the Company issued $1.44 billion in aggregate principal amount of 0% convertible senior notes due 2026 (the 2026 Notes).
1. What is the accounting treatment of this and also how this should be treated while doing financial analysis including comparable company analysis (for example for calculating the fully diluted shares outstanding)?
Data Source: Twitter’s 10-Q Filing – For the quarterly period ended June 30, 2022 (Notes to Financial Statements – Convertible Notes and Senior Notes)
2. And also, if company already issued convertible notes, then how can a company issue warrant for the same convertible notes to the other parties? (Correct me with valid reason if I am getting it wrong!)