Rivian (NASDAQ: RIVN) stock is down 23% on the day. RIVN stock is down because they did a capital raise. More importantly, Rivian raised more capital through an issue of convertible bonds. This is an expensive way of raising money, true, but that’s not really the significant point here. By their nature, or perhaps the reaction to, a convertible bonds causes short selling of the stock. Therefore an issue of a convertible is likely to reduce that common stock price. This is just the way that it works.
Rivian itself is an EV maker of course. Backed by Amazon, so we know that management is going to be operationally competent - something we’d not say about Lordstown or Mullen Auto perhaps. One of those already in Chapter 11 and we’d all be pretty surprised if the other doesn’t follow soon enough. Amazon’s involvement doesn’t mean that Rivian is going to break through, as Tesla did, but it raises the odds. Maybe they will be able to confront that coming wall of Chinese competition from the likes of Xpeng and BYD. Don’t forget, the American market is protected by those 25% tariffs on Chinese imports.
So, there’s a hope at least, shall we say, that Rivian is a real contender. But why should the RIVN price drop 23% on the issue of a bond? Seems a bit excessive. Ah, but a convertible bond is different.
Rivian stock price from Google Finance
We can think of this as a purely technical issue but it’s a real one so we should understand it. The convertible bond is issued, it can either be repaid with cash on maturity or be converted to equity, common shares. It pays bond interest in between now and then. So, for a holder of the convertible note or bond this is like owning the equity but also getting a bond interest payment along the way.
It’s possible to take this further too. If the convertible holder short sells the common equity at the same time as buying the bond then they’ve locked in a profit. If the share price rises above the conversion price then they convert, deliver stock into their short position. They’ve received bond interest. If the equity doesn’t rise to the conversion price then they get their cash back, plus the bond interest, and have made a profit on the short position. The outcome of this is that they don’t need to take a view on Rivian equity - it still makes sense to short the equity and own the convertibile. The limitation on this position is that the carry cost of the short position needs to be less than the bond interest being paid. Assuming that’s true then a convertible bond issue will - will - lead to short selling.
Yes, this is a technical issue but it’s one that matters. Issuing a convertible bond puts downward pressure on the common equity price.
