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https://investors.atlassian.com/financials-and-filings/news/...

Atlassian just issued convertible notes. Their current cash is ample enough to run the business so a likely conclusion is they'll use this for acquisitions.

This is the same type of convoluted financing PSTG did - convertible notes with a capped call.

I *think* I understand it now.

Upon maturity, par value of the notes will convert into shares if the price is above, in this case, $81.52 (42% premium to today's price). $1,000 gets you 12.27 shares at maturity. Atlassian wants the price to be as high as possible at maturity so dilution is limited.

However, the note holders want the price to be low (buy low) upon maturity. So, they've negotiated a cap on the transaction which in this case is a 100% premium to today's price. That is the most they will pay for shares. That is the only reason the note holder would accept the paltry interest rate of 0.625% annually for these notes. They are likely quite bullish.

I believe the above is correct, but feel free to critique it.

Thanks,
A.J.
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That helps, AJ. Thanks!

Matt
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Comparing the two financing deals (PSTG & TEAM), they are almost identical.

https://investor.purestorage.com/news-and-events/press-relea...

Pure's conversion would take place at a 32.5% premium (Atlassian 42%) and the capped call would take place at 100% (same as Atlassian).

The only real difference I find is the following from Pure:

The notes will be convertible into cash, shares of Pure Storage's Class A common stock or a combination of cash and shares of Pure Storage's Class A common stock, at Pure Storage's election.

This may allow Pure to control the dilution to an extent.
But here's a puzzling comment from Pure's release:

The capped call transactions are expected generally to reduce potential dilution to Pure Storage's Class A common stock upon any conversion of notes and/or offset any cash payments Pure Storage is required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $39.66 per share (which represents a premium of 100% over the last reported sale price of Pure Storage's Class A common stock on The New York Stock Exchange on April 4, 2018).

The bolded part makes no sense to me if my understanding of the transaction is correct (makes me wonder). The capped call is better for the note holder and not the company/investor. It maximizes dilution in the case the stock is higher than the capped call strike.

What am I missing?

Thanks,
A.J.
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Thanks A.T. for sharing your understanding of the deal. It makes sense! I used one of its products, confluence, at work, it is mainly for team projects, and I like it a lot. I took the opportunity the market offered after its latest earning report and added to my shares.

Zangwei
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Thanks A.J. Sorry for the fat finger!

Zangwei
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Upon maturity, par value of the notes will convert into shares if the price is above, in this case, $81.52 (42% premium to today's price). $1,000 gets you 12.27 shares at maturity. Atlassian wants the price to be as high as possible at maturity so dilution is limited.

However, the note holders want the price to be low (buy low) upon maturity. So, they've negotiated a cap on the transaction which in this case is a 100% premium to today's price. That is the most they will pay for shares. That is the only reason the note holder would accept the paltry interest rate of 0.625% annually for these notes. They are likely quite bullish.


I can’t believe you all let me get away with this BS above. It is incorrect.

Here is a better description of a convertible note with a capped call deal.

A convertible note is just a bond with a call option (bought call that is). In the case of TEAM (and remember PSTG just did the same), note holders will be paid back their principal if the shares aren’t trading at $81.52 upon maturity.

Without a capped call, note holders may have the option of exercising the embedded call if the stock price is above $81.52. This is the reason they are willing to accept such a paltry interest rate on the notes. They get to participate in the upside above the strike price.

However, the company pays a premium for the capped call which raises the strike price (in this case raised to $114.81 or 100% above the market price upon issuance). With the capped call in effect, the note holders do not participate in the upside until above $114.81. That is the new embedded call strike price essentially.

It is not clear who has the rights upon maturity in the case of Atlassian. With PSTG, the press release clearly states the company has the right to either pay in cash or issue shares. PSTG intends to pay back the principal amount in cash and issue shares to cover the upside above the capped call strike (net share settlement).

Hope this made sense and let me know of any questions. Sorry for posting falsehoods before.

A.J.
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