Issuing a Convert on an IPO stock:

Traveller's New Issue's underlying stock is the IPO stock that will be issued
the same day the converts are priced. Assume that the IPO price is set around 18$.
The Conversion Premium is at 20-25% of Stock Reference.

Given how IPO's perform, Stock Price could be over the Conversion Price on the First
trade day itself (or probably very soon).

a. why would one buy the convert rather than the IPO itself.

b. why would you issue such a convert as when converted to stock (which seems possible
) will cause dilution and push stock price down.

Any help in understanding the deal greatly appreciated.


Regards

I may not understand the questions.

You would buy the bond because if Travelers stock does not do well you still make 4.5% (assuming it does not do so badly as to default). Even if you eventually convert, you might make more in coupon payments from the bond minus dividend payments on the stock, than you pay in premium.

The advantage to Travelers from issuing the bond as opposed to stock is it gets 25% more per share if the stock does well. The disadvantage is it has to pay back the bond plus 4.5% per year cash interest if the stock does not do well. I don't know the detailed thinking behind the two securities, but my guess is Citi wanted to dispose of a good chunk of Travelers equity in a way that would not interfere with its own plans to sell its own stake over the next five years. Or, it might have been as simple as thinking there was good demand from convertible bond funds.

Aaron,

Thanks the points were very helpful, appreciate your reply.

Regards