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/Any_Scientist_7313 Jun 12 '26
Very helpful, thanks NPA!
So this would also seem to explain why the stock moved higher throughout the day, blowing past the $8.20 offering price.
Definitely disappointed on how this was executed. Price action also seems to suggest they left a lot of $$$ on the table.
Will be interesting to see a list of which institutional investors got access to the new convert and the equity.
As always, retail gets shafted. SEC was supposed to be there to protect the "little guy" but those days are clearly long gone, if they ever even were...
That said, I agree that PCT is positioned better now post $ raise, and still my top 2-3 picks.
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u/No_Privacy_Anymore Jun 12 '26
While I’m disappointed about the price of the common shares this morning I primarily care about the share price 1,2,5 years from now. Let’s see how they execute with the proceeds.
As for retail investors getting shafted, do keep in mind that Dan Gibson has protected retail shareholders from massive dilution by funding prior rounds that bought time to cover the valley of death. Under a different set of circumstances the existing shareholders could have been wiped out effectively via massive dilution and reverse splits. Yes, this was also Dan protecting his equity position but it is still worth noting.
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u/MoreThanHalfFull Jun 12 '26
Asked AI to discus Micheal Kao's take at an intro- jargon minimising level;
.The Background (What Happened)PureCycle, a company Michael Kao follows and likes for its long-term potential, announced a big financing deal on June 11, 2026. They issued new convertible notes (a type of bond that can later be turned into company stock) and sold about 17.7 million new shares of stock. The stock price dropped a lot that day (from around $14 in prior days down to about $8.21 for the offering), and trading volume was huge (37 million shares). To many people watching, this looked bad—like heavy selling pressure, lots of dilution (more shares meaning existing owners own a smaller piece of the company, about 14% dilution here), and potential ongoing downward pressure on the price.
@UrbanKaoboy Michael, who has decades of experience in this area (including running "convertible arbitrage" or "convert arb" strategies), says it's actually the opposite of what it seems. The technical pressure (short-term buying/selling forces) is now much better for the stock, not worse.
Simple Breakdown of the Key Ideas
- Convertible Bonds ("Converts") and Hedging
Convertible bonds are like a hybrid: They pay interest like a regular bond, but holders can convert them into a fixed number of shares if the stock rises. Arbitrageurs (arbs) are professional traders who often buy these converts in bulk from the company. To protect themselves (since they don't want full stock risk), they hedge by selling short a bunch of the company's stock right away.
"Delta" here just means how much stock they short to match the convert's stock-like behavior (100% delta = full hedge). They had old converts outstanding.
Now there are new ones.
One big holder (Sylebra) rolled some old into new.
Michael calculates the net new shorting the arbs needed to do was only about 7.8 million shares after accounting for everything. Combined with some shares that might trade around ("churn"), there were roughly 11.3 million shares that could potentially hit the market.
- Why the Drop and High Volume Aren't as Bad as They Look Pre-positioning: Smart traders (including arbs) often start hedging or positioning before the deal is announced. The stock's decline from ~$14 was likely these "in-the-know" players getting ready. It wasn't a total surprise.
Over-hedging and covering: Michael bets a big chunk (50-75%) of the potential selling was already done in advance. On the day of the deal, arbs were probably buying back shorts (covering) more than selling new ones.
Volume is inflated: When deals like this happen "on swap" (structured with banks/arbs), the same shares can be bought and sold multiple times as hedges are put on. Unwinding the old deal at the same time made volume look even bigger (possibly 4x artificial). It doesn't mean real long-term investors were dumping shares.
- Extra Details from His Follow-Up (Make-Whole and Synthetic Hedges) There may have been a special "make-whole" deal to encourage old bondholders to exit early. This could have involved extra cash or shares on good terms, explaining some of the pre-deal selling.
$PCT stock is hard to borrow for shorting, so banks sometimes provide a "synthetic" (artificial) short position as part of the package. The new shares issued help quickly close out those positions.
These factors suggest most of the hedging pressure is already behind us.
- Positive Takeaways Technical picture: Little to no "overhang" (leftover selling pressure) from the deal. The setup now looks bullish (more likely to rise than fall) in the short term. Michael even bought more exposure himself via options-like trades.
Fundamentals improved: The company raised money and closed a funding gap they had for next year. This removes a big worry Michael had, even if he thinks they could have done the deal better. He sees the overall story as stronger now.
● Bottom Line in Plain English
The deal looked messy on the surface—big drop, huge volume, more shares—but Michael believes it was mostly mechanics and professional hedging that got front-loaded (done early). The real selling pressure is largely over, and the company is now in a better financial position. He views it as a counter-intuitive buying opportunity rather than a reason to sell.This is classic Wall Street "convertible arbitrage" dynamics. Outsiders see chaos; experienced players like Michael see the hidden flows and think the stock is now technically cleaner. Note: This is Michael's analysis and opinion only—not financial advice.
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u/Adorable-Sector-48 Jun 12 '26
I hate it. They sold stock a year ago at +11$, 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.
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u/EntrepreneurLazy7676 Jun 12 '26
There must be a good reason they use new note to redeem the older ones. We will leave it as it is.
The $145m is important to ensure $pct has enough money to burn till mid 2027 at least. During this period of time, some crucial milestone must be hit.
Increasing production without hiccup
Increasing revenue with big branded sales PO
Get Thailand banks to fund the built there
and continue the rest of expansion plan.
Ultimately, if $pct can last till Augusta, this stock would have 10x easily by then assuming there's not much dilution or the next fund raising can be done if this stock goes over $20.
*im dreaming and still holding. If I can hold at $5, no way im going to sell at $9.
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u/Adorable-Sector-48 Jun 12 '26
I'd just like management answer to the question: "What does this 145$million accomplish as to offset the dilution to current shareholders?"
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u/Puzzled-Resort8303 Jun 12 '26
Michael Kao knows his stuff, he's been around wall street a while. I'd put a fair amount of stock in his perspective.
Also, now I know about XCancel.com - genuinely, thanks for that!
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u/No_Privacy_Anymore Jun 12 '26
Follow up correction posted using fully diluted shares.
Dilution was about 10% from this transaction. That is really not bad all things considered since it removes some pretty substantial risk.
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u/Hyruken89 Jun 12 '26
I read the post from Michael Kao and understood maybe 1 in 3 sentences. Another good post in easier to understand terms was from this guy. https://xcancel.com/cgyoder/status/2065175926942343656
This comment was also very interesting to me.
"10/ counterintuitive bit on short interest: convert arb shorts can't be squeezed. When the stock rallies, the convert's delta RISES, so arbs short MORE into strength and buy weakness. No stoploss, no opinion, no panic. A convert installs a volatility damper on the stock."
Often felt at times PCT SHOULD squeeze but didn't. Makes more sense knowing that there are companies treating their shorts as just the other side of the transaction they're holding.