The Spread Thread @SpreedThread1

Would I buy this debt now? No. A yield closer to 20% is a more appropriate target. However, we want to highlight situations where the equity could be dead money (as is often the case post-bubble) but the debt may have value. More to come on some other busted converts... 7/7

3) Competition will increase. The current 70%+ transaction margin will attract competitors like Fidelity, who is already entering the space 4) At ~$200mm of EBITDA, COIN is FCF breakeven. This would be terrible for the stock, but “enough” for the '26 convert to get repaid. 6/7

A few reasons the bonds may be better rel val vs the stock: 1) To get 13% per year return for 3.5yrs (i.e. same as the '26 convert) puts the stock at $83, or ~27.5x on '25 EBITDA, a premium to peers. 2) COIN relies heavily on dilutive stock-based comp. Last 3 Qs were $350mm+ 5/7

Using a stressed scenario where EBITDA remains at 2022 levels, they still have enough cash to repay the $1.4b ’26 maturity. Of course, things can get worse than this. 4/7

The 0.50% '26 is worth a look vs the stock given it is the 1st maturity and COIN's $5b of cash. Using sell-side est, here is a cash walk through '26 ("other" includes my est. of addtl recurring cash outflows). In this scenario, COIN has enough cash to repay the '26 bond. 3/7

First up: Coinbase Disclaimer: This is a focus on rel val, not a crypto discussion COIN has 3 unsecured bonds totaling $3.5b. The nearest maturity is a $1.4b 0.50% convert due '26, convertible at $370.45 (i.e., busted or far out-of-the money), trading ~67. 2/7 Capital structure:

Dumpster diving in busted converts! We will focus on a few names in the next month or so. Many know these equities well – this is a way to look at the same companies from a different angle (converts/ debt). 1/7

Quick clarification based on responses. Yes, 25 is obv most likely. I’m just saying Powell must be worried whether inflation will fall to and remain at 2% if the labor market stays tight and fin cond are easing. If they signal 25 and the SPX rips to 4200, he will be more worried

Interesting dilemma for Powell. Middle of the road inflation report. Inflation clearly coming down, but services sticky, while the labor market remains tight and financial conditions are easing. Does Powell push back on that by floating 50bp is still on the table?

Similar chart showing the deterioration in small biz lending conditions…

The Spread Thread @SpreadThread1

3 years ago

Similar chart showing the deterioration in small biz lending conditions…

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Assuming $100mm of actual cash interest and ~$200mm of capex, they need $300mm of EBITDA to break even on FCF. Consensus for next year's EBITDA is negative $250mm.

Following up on BBBY, here is a simple waterfall on the equity value using sell-side estimates for FY'26 EBITDA and actual EBITDA 2yrs ago. For context, BBBY said they did negative $225mm of EBITDA last Q.

The Spread Thread @SpreadThread1

3 years ago

Following up on BBBY, here is a simple waterfall on the equity value using sell-side estimates for FY'26 EBITDA and actual EBITDA 2yrs ago. For context, BBBY said they did negative $225mm of EBITDA last Q. https://t.co/DuMapKxX7V

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BBBY up on M&A speculation. With bond <$10, ~150mm of cash, and a terrible Q4 pre-announce, odds are they file. Plus, a BuyBuyBaby sale pre-filing opens up fraudulent conveyance risk. When retailers get into trouble, suppliers tighten payment terms, often a death spiral to ch.11

Of course, timing is the hard part. I am open to the idea that it could 'feel' like a soft landing for several months. A point I've made many times - the economy moves slowly. But the data does not support a true soft landing. Would love to hear what I'm missing... 7/7

In the one true soft-landing, 1994, the Fed started cutting rates just 5 months after they finished hiking as the economy began to stall in early '95. If policy REMAINS highly restrictive, as the Fed is suggesting, a soft-landing would be truly unprecedented. 6/7

Also, a common misperception is that once the Fed stops hiking, the tightening is done. Even ignoring QT, remember, if the Fed gets ~5% and stops, the drag on the economy from restrictive policy remains, arguably grows over time (more co's have to refi over time, etc...). 5/7

Per the LEI index, "workers...usually work fewer hours when employers plan to lay off workers in the future." I get it - we all see what we want to see in the data, but is this really good evidence of a soft landing? (LEI Avg workweek chart below) 4/7

Zandi says businesses are using other ways to reduce labor cost - "pulling back on hiring, cutting hours, cutting temp help." But is this not EXACTLY what happens as business activity starts to slow before companies start laying off workers? 3/7

Is labor supply coming back in a big way? Is the Fed going to cut rates to neutral soon? Something else? Or is this soft landing call just a guess that employment will hold up? 2/7

And note, while many "expect" a recession, market internals suggest they may not be positioned for it. Positive economic surprises late last year coincided with a big rotation into cyclicals like Industrials from Tech. May be time for that trade to reverse for a while. 3/3