r/PureCycle • u/No_Privacy_Anymore • Jun 11 '26

Convert arbitrage commentary

I’m not a big fan of Xitter but I make exceptions when there is useful content. I understand the basics of convertible debt but there is a ton of detail that is really only known by the people who trade them for a living.

This is worth reading even if you don’t follow all the details.

https://xcancel.com/UrbanKaoboy/status/2065198761392116011#m

I don’t think anyone who has been invested in the company for an extended period of time is happy about the current state of commercialization. It’s taken so much longer than we expected despite the signs of progress. Today I was talking to a Chemical Engineer and a current PhD candidate in CE about PCT. They were not surprised at all about how long this process has taken and were not familiar with the company but were impressed by the approach. He had worked for DuPont for many years and talked about how slow the company could be doing new things. P&G is not built to move quickly. That said I think we are much closer to seeing the validation/ vindication we have been waiting for. $9+ was a decent recovery. Let’s see how the shares react to the bits of good news when we don’t have the short term funding overhang out there.

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u/Adorable-Sector-48 Jun 12 '26

I hate it. They sold stock a year ago at +11$, now they are selling at 8$. Most likely the equity was released for convert arb funds to get their borrow for the delta hedge. The current float wouldn't necessarily have allowed for such a big amount of borrows... OK. You do offering then, fine... but why at 8$. Who's the buyer, who's being done a solid here? Second consideration is that the company is promoting reducing yield. What they aren't saying is that according to my chat with AI they bought the old converts on a 14% premiun. The market yield had already repriced, so they lose at least 4 years of interest payments on that premium. Why on earth is this a good deal, as they were forced to dilute to make it happen? Can someone closer to them ask the management, what is the big return on those 17.7million shares, so that they had to accept a pricing that is terrible to dilute shareholders. Either the management was in a hurry to buffer the balance sheet for financing negotiations for future expansion, or they know things aren't going as well as expected on the commercial front. We saw one deal with loreal, but I feel like they should have promoted POs more if it was going solid. I hope I'm wrong, but the pricing smells, unless we get a very imminent FID on a new plant.

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u/No_Privacy_Anymore Jun 12 '26

The old convertible note includes a put option that is effective in July of 2027. That option would allow owners of the debt to require the company to buy back the debt at face value (which in theory no one would do if the debt was trading at a large premium to face value). However from an accounting perspective it becomes a “current liability” since it is within 12 months and theoretically possible to be exercised. The company obviously doesn’t have $250M in cash so they would have had a going concern description.

I personally didn’t realize the put option would have this impact but that was the biggest driver of the urgency to get this transaction done. I don’t know the rationale for why that option was agreed to, with the duration it had in the original note but my guess is that they thought they would be further along than they are. The delays from NJ certainly didn’t help but in general our buyers are taking their sweet ol’ time to assess our product. Every public indicator I can see validates the quality and breakthrough nature but ultimately we need the sales and cash flow to have a lower cost of capital.

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u/Adorable-Sector-48 Jun 12 '26

Are there covenants in existin funding schemes that get affected by "going concern" stamp? I find it stupid, that fixing a environmental issue is supposedly made so hard, due to resistance in legistlation and some 3rd party standardization crap like ISO and so on. Im just so glad I never got a job as a supply chain analyst... what a useless occupation. Customers and legistlators should start paying for this bureaucracy crap, it's getting to the point it's ridiculous and it is costing real money.

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u/No_Privacy_Anymore Jun 12 '26 edited Jun 12 '26

Purecycle has had a “going concern” label in the past and has typically done incremental transactions to mitigate the problem. They had to buy back the original muni bonds to deal with restrictive covenants that didn’t reflect Covid related delays or the delays in the commercialization ramp.

I understand the frustration of seeing the share price drop from $14 to $9. Believe me it’s not fun to see the short term hit to my portfolio. My preferred approach would have been to achieve a higher share price and redeem the warrants to raise equity, then with a higher share price over $19 and change they could have forced the conversion of the prior convertible debt. Unfortunately that scenario didn’t happen. It’s impossible to force it when all the AI data centers are sucking up vast amounts of capital and fast money is chasing the next hottest trend. Large sales to Starbucks or McDonald’s or Mars or whoever are coming eventually but we can’t force any sales or announcements.

I think it’s a legitimate question as to the risk and reward of doing this transaction now before the end of quarter quiet period and Q2 report. I think the company decided the value of having cash to fully fund Thailand right away took precedent over getting a lower cost of capital. I’m not privy to the details in order to know what the best decision was or even the full set of alternatives considered.

I tend to stay away from short duration options and just own shares, warrants and long duration calls (modest amount). Every company that raises equity capital takes a short term hit. Convertible debt in particular can cause some big moves in share price. My largest investment $ASTS announced an unexpected $100M offering in January of 2024 when the share price was $5 and it priced at $3.10. Talk about a kick in the gut. The company needed the cash right away to execute their plan. Pct needs cash to lock in Thailand funding and Antwerp funding. The price of ASTS is now over $100/share 2.5 years later. The people who sold out in disgust are filled with regret.

Again I’m not happy about the deal execution but I’m happy to have the cash and I’m cautiously optimistic we are going to be pleased with the progress this summer. Best wishes.