Had a really interesting conversation with @matt_levine about the intersection of technology and finance, coming to an Internets near you in the not too distant future.
I definitely learned something; hope everyone will enjoy it.
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Specific interesting thing from about the first minute: I asked Matt what a convertible bond was for the audience and he gave the true technical answer (a bond which can be surrendered for stock at some agreed upon terms) and why it was interesting to companies.
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That reason: you should only convert the bond above some share price, which effectively means you have a call option on buying the stock. Call options are more valuable if volatility is high. This is well understood.
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Therefore, a borrower running a business with high variance (like a tech company with unproven model or a biotech firm) can get a loan which they’d probably not qualify for under traditional underwriting standards (“Where’s your cash flow?!”) by bundling implicit option premium.
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That’s kind of beautiful: the very fact that your business is risky de-risks the offering enough such that you can access the money necessary to take your risky shot.
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Replying to @patio11
I think the phrase "moral hazard" needs to show up somewhere in this discussion
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Replying to @vielmetti
Hopefully all parties to this know the score, which defangs the risk of moral hazard. It’s two large, sophisticated companies with finance departments and dangerous professionals staffing them making an agreement through the service of the investment bank.
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Presumably in most cases the finance department at the lender doesn’t say “Alright everybody we’ve got the money! Yolo! See you in the Caymans after we crash this company into the side of a mountain!”
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