GameStop Follows MSTR's Footsteps: Why Will Investors Buy Convertible Notes With No Interest?

As GameStop Corp. GME has announced a convertible bond offering to acquire Bitcoin BTC/USD, mirroring Strategy Inc.‘s STR plan, experts explain why investors would buy a bond with a 0% coupon.

What Happened: After announcing the change in its investment policy to include Bitcoin as a treasury reserve asset, Ryan Cohen‘s GameStop announced a proposed private offering of $1.3 billion of 0% convertible senior notes.

These notes are general unsecured obligations of GameStop, which will not bear regular interest, and the principal amount of the notes will not accrete.

Institutional investors usually invest in convertible bonds because they’re a hybrid investment instrument that can be exchanged for equity in the company at a later date. The conversion feature of these notes eventually helps the debt holders to participate in the equity upside on conversion.

But apart from that, according to Tom Lee, the CIO at Fundstrat Capital, these bonds also provide debt investors an exposure to Bitcoin, which he described as a “novel strategy,” in the case of erstwhile MicroStrategy, led by Michael Saylor.

“You might wonder why are bondholders buying these bonds? They are offering for the first time, the ability for someone to put a $1 billion worth in a bond world to own a bond that has exposure to bitcoin,” Lee said.

Why It Matters: Also, the risk faced by such bonds usually includes refinancing of the debt, explains Bryan Goldstein, the client advisor at Matthews South.

“The risk is similar to any debt repayment where there is a fixed amount that needs to be repaid, and if the company doesn’t have cash to repay the bonds they need to refinance – if equity is one of the options, it would require more shares to be issued,” Goldstein said.

Furthermore, since the bonds are general unsecured obligations, they aren’t pegged to Bitcoin value directly.

“There are generally no financial/maintenance covenants in unsecured convertible bonds that could put the company at risk. The main risk again is on the refinancing at maturity that if the company has assets in bitcoin that need to be liquidated at a lower point, then it stresses the financials of the company,” added Goldstein.

“Clearly, the market price of the stock and thus the converts will move with the price of Bitcoin. But if Bitcoin fell to $1,000 tomorrow, it would not trigger anything with the bonds. They would still have the same maturity schedule,” said Eli Pars, the co-chief investment officer at Calamos Investments.

Price Action: GameStop rose 11.65% on Wednesday, and it was down 7.40% in premarket on Thursday. The stock has fallen 7.50% on a year-to-date basis, whereas it is 115.34% higher over a year.

The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, were mixed in premarket on Thursday. The SPY was up 0.053% to $568.89, while the QQQ declined 0.060% to $484.09, according to Benzinga Pro data.

Benzinga's Edge Rankings suggest that GME is experiencing a negative price trend for both short and medium-term periods. While its momentum was ranked at the 92.93th percentile, growth and value rankings were notably weak, detailed information is available here.