Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Or COIN flipping you?
Coinbase just announced a $1.25b convertible bonds issue. These bonds mature in 2026 (5 years), and are convertible to class A stock (that’s the regular COIN that is being traded).
This is… weird?
Usually, when a company goes public, it is so that they can sell shares to the public and raise money. In that moment (traditionally an IPO, but Coinbase used a “DPO”, direct public offering, where it sells directly in the market instead of to market makers), the startup-soon-to-be-public-company is supposed to sell as many shares as it needs, so that it can fund itself until it becomes profitable, after which, it can fund itself perpetually.
Usually, a company does not need to raise debt, nor sell more shares for a while after it goes public, because, well, they generally have a good idea of how much cash they need, and with a marvelous invention called a calculator, they can generally figure out how much shares they need to sell in the IPO pretty accurately. To have to sell bonds so soon (Coinbase went public only about 1 month ago) is highly unusual.
Even more surprising, Coinbase’s DPO sold pretty well! Coinbase had expected to sell shares at around $250 a piece, but instead, it sold them at a high of $400 a piece (2). That’s a 60% upside! And since it’s a DPO instead of an IPO, Coinbase should have been able to keep that additional upside.
Even more even more surprisingly, the convertible bonds are being sold with basically no coupon — 0% – 0.5%. While the market will likely price it at some yield (by paying less than par for the bonds), generally the coupon is in the ballpark of the initial yield the issuer expects the bonds to sell at. Now, what are convertible bonds with basically no yield? Aren’t those just… options (1)?
So, again, why is a company, barely 1 month old in the public markets, selling options to the public?
Footnotes
- Technically, warrants.
- I found out after this post went out that Coinbase didn’t sell any shares in the DPO, only the insiders did. This is even more bizarre. A company of Coinbase’s size and operations, should be able to predict cash needs at least 2-6months in advance. So if they are raising cash because of a liquidity issue, then they should have known this months before the DPO. Why not just sell some shares in the DPO alongside the insiders? Or do the bond offering before the DPO (or bring on additional investors while it was still private)?
- It’s not a good look when insiders get to sell to the public at ~$400 a share, and then the public gets diluted almost immediately by the bond/option offering… after the stock already fell 30+% to ~$250.
Janky Thoughts 