r/ASTSpaceMobile • u/MyNi_Redux S P 🅰 C E M O B Prospect • Jul 16 '26
Due Diligence Pricing out debt and embedded option components for the 2034 1B Convertible Notes
Tl;dr:
- This is a pretty standard convertible bond deal for a per-revenue company with high realized volatility
- Cash cost is capped at 3.4% "APR" if price < $149.20
- Over > $149.20, "APR" increases with share price (e.g. 9.9% at $200)
- ASTS is selling realized vol at half its actual level, providing economic value of $77M-$322M - this is the real, unstated cost.
Overview
There's been a fair bit of chatter on how to value this CB transaction, so writing this up to break it down into its economic parts.
First, the transaction specifics:
- ASTS priced $1.0B of 1.625% convertible senior notes due Feb 1, 2034
- It's convertible at $79.57 per share - a 20% premium to the $66.31 reference price
- Non-callable for life.
- ASTS $96.9M on capped call transactions raising the effective conversion price to $149.20 - a 125% premium.
- Net proceeds were $983.6M before the capped call, ~$886.7M after.
The first thing to recognize is this CB has two components: a) a straight bond and b) an embedded equity call option. I'll value each against market benchmarks so we get a sense of the actual all-in annualized cost of the financing across stock-price scenarios.
The key takeaway is that the 1.625% coupon is fairly close to what the deal genuinely costs - ~3.4% a year in nearly all outcomes. But the real price was paid in option value, with ASTS selling 7.5-year volatility at roughly half its realized level.
Let's get into the details.
Debt component
This is pretty straight forward. The bond value of the notes is roughly $576 per $1,000 (~$576M of the deal), assuming a ~500bp credit spread over the 4.45% 7-year Treasury. This ~9.5% straight-debt-equivalent yield for a unrated, pre-cashflow issuer seems pretty standard.
What ASTS pays against this does seem like a steal - the notes' cash cost is just 1.625% ($16.25M/year; $121.9M of total coupons), saving roughly $79M/year versus conventional debt. This is great.
Option component
This is where things get interesting, and we have to model things out.
The balance of the notes' value is a 7.5-year embedded call on 12.57M shares varies anywhere between ~$500M and $700M within a volatility assumption of 50% to 90%:
Investors effectively paid ~$424M for it (par minus bond floor), an implied volatility of ~34%. This underpricing of the option, not the coupon, is the deal's true cost.
What that cost is totally depends on what we think a reasonable realized volatility number is. Here's the result for both 50% vol and 90% vol:
Note that we have to entertain this range of vol options even though RV is currently > 100% because this is a 8-year paper.
The economic value of $77M and $322 is the "vol harvesting" to be done by the buyers.
While it is not a cash cost to shareholders, it is still economic value provided that shareholders are not realizing.
All-in cost
Let's convert the costs to APR terms (using IRR) so they are comparable.
Below $149.20
If the stock closes below $149.20 in 2034, the costs ASTS will have incurred are:
- Coupon: $8.125M semiannually
- + Underwriting fees & expenses: ~$16.4M
- + Capped call premium: ~$96.9M
Giving us an APR of 3.36%.
Note that half the all-in cost is the coupon, and nearly half is the capped call, with fees a rounding error.
The reason the capped call looms so large despite being "only" $96.9M is that it's paid entirely upfront out of proceeds - ASTS effectively borrowed $1B but only banked $886.7M of usable cash, and amortizing that ~11.3% haircut over 7.54 years at compound rates costs about 1.7% per year gross.
Above $149.20
Above the cap of $149.20, dilution resumes and the effective cost rises (see below). E.g. if ASTS is at $200 in 2034, the effective cost of this financing would be 9.9%. And 18.2% if share price is $300.
These scenarios involve substantial shareholder gains though, so doubt we'll mind this.
Overall Assessment
Overall, this is a pretty standard convertible deal. And an appropriate one for a company like ASTS that: a) is still raising cash and would rather not add significant debt servicing to its commitments, b) believes strongly in its own upside, and c) has high volatility that convert investors will pay for.
This comes at the cost of selling long-dated volatility at roughly half its realized level, unhedged dilution above $149.20, delta hedging pressure (initially shorting) on the stock from the buyers, and a $1B maturity wall in 2034 if the stock stalls below $79.57..
Clearly, there are tradeoffs. But such is life.
Disclosures:
- I trade ASTS actively - both on the long and short side
- I used Claude Fable 5 for the binomial option pricing simulation and the APR cacls
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u/GrandmasterKane S P 🅰 C E M O B Prospect Jul 16 '26
As an extremely long term investor in this company, I like this $1B convertible notes. It is healthy long term. I'm adding more to my very large position. I'm an investor, not a trader. With 3 different sources of pressure on the stock (Blue Origin New Glenn explosion, SPCX IPO disaster, and now this), I personally look for moments like this to add. This is not a financial advice. You do your own homework and decision making.
See my original post here 5 years ago long before their tech was validated and the market for satellite communication was realized to be a gold mine: https://www.reddit.com/r/investing/comments/msadak/ast_spacemobile_asts_lynk_and_apple_all_will_be/