Everything You Need To Know About Upstart's Convertible Note Issuance

Aug. 18, 2021 2:28 PM ETUpstart Holdings, Inc. (UPST)44 Comments26 Likes


  • Last Monday, Upstart announced a $575 million convertible note offering, and the company announced the pricing of the notes yesterday.
  • Some investors seem to be confused about the dilutive effect of this note offering, and I will address this issue in this article.
  • From purely a supply vs. demand perspective, Upstart shares should rise following the settlement of the bond sale on August 20.
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Upstart Holdings, Inc. (NASDAQ:UPST) reported blowout earnings for the second quarter, which I covered in my previous article. Since then, the stock price has continued to hit new highs, and more interestingly, the company announced a $575 million convertible note offering. From some of the comments published by Seeking Alpha readers in a few recent news articles, I realized that some investors are confused about how this convertible bond issuance will affect their ownership stake in the company. I am long Upstart shares myself, so I thought it best to evaluate the note offering to make sure I am not missing any important details as well. The findings of this analysis reveal Upstart is doing what needs to be done to take the company forward.

The convertible note offering

On August 17, Upstart announced the pricing of $575 million convertible senior notes due 2026 to institutional buyers. The sale of the bond to initial purchasers is expected to settle on August 20, and these investors have a 13-day period to invest an additional $86.25 million in these convertible bonds as well. Upstart will realize approximately $561.2 million in net proceeds from the initial sale of this convertible offering (without accounting for the additional $86.25 million). The company will pay bondholders interest at a rate of 0.25% per annum on the principal amount.

The distinctive feature of a convertible bond is that it allows the bondholder to participate in the growth of the company by converting their bonds into common shares of the company subject to the conditions set out in the indenture. Upstart's convertible notes that will mature on August 15, 2026, can be converted into equity securities of the company at a conversion rate of 3.5056 shares per $1,000 principal amount of notes. The implied conversion price, therefore, is $285.26 per share. Upstart cannot redeem the notes until August 20, 2024, but thereafter, investors should anticipate a possible conversion of the note into common shares. Noteholders supposedly can force Upstart to redeem the notes "upon the satisfaction of specified conditions and during certain periods," and I am waiting for the relevant regulatory filings to determine the exact terms.

Will these notes result in ownership dilution?

Let's address the elephant in the room. I presume an investor, almost always, would be wary of a dilution in ownership. With this in mind, let's figure out whether our ownership interest in Upstart is at risk here because of the issuance of these convertible notes.

Companies often use capped call options to reduce the expected ownership dilution resulting from the conversion of notes, and this is exactly what Upstart has done. The company has negotiated capped call transactions covering the exact number of shares underlying the notes, at a cap price of $400.36. As a rule of thumb, a company that uses capped call options to safeguard the interests of existing shareholders uses a strike price for these options similar to the conversion price of the convertible bonds. In this case, the strike price/conversion price is $285.26. You might still be confused as to what is happening, so let me explain in simpler terms.

If noteholders decide to (or Upstart for that matter) redeem the convertibles by converting them into common shares of Upstart at a price of $285.26 per share, Upstart will have to issue new shares to honor this conversion. When this happens, the ownership interest of existing shareholders will be diluted as the company would be issuing new shares. However, now that the company has entered into capped call transactions, Upstart can execute the call options to buy the required number of common shares from the option counterparties (writers of the option). Option counterparties will not (and cannot) issue new shares for this purpose, so they will be using existing shares already issued by Upstart to honor this request. In such a scenario, no new shares will be issued, and existing shareholders will not be diluted. The option, however, will be automatically executed at the cap price of $400.36 (that is why we call it a capped call option), so beyond this stock price, existing Upstart shareholders will still be diluted no matter what because the company will be forced to issue new shares.

From purely a trading perspective (I am not a trader, so I could be wrong here), Upstart stock price should ideally increase in the coming weeks as option counterparties are likely to purchase Upstart shares in view of the commitment they have to deliver UPST if the capped call options expire in the money.

What will Upstart do with the note proceeds?

Upstart will use $50.9 million of the net proceeds to pay the option premiums associated with the capped call transaction. The remainder, as confirmed by the company, will be used for "general corporate purposes." This leaves me in no good position to comment as to what purpose the company will use the money as general corporate purposes can include anything from boosting working capital, investing in technology, acquisition of an ownership interest in another company, or even to pay the salaries of employees. I am as clueless as I could be, so I'm waiting for more color on the use of proceeds.


Upstart is well and truly a growth machine, and I am intending to remain invested in its stock in the foreseeable future. The convertible note offering that was announced a couple of days ago does not change my stance on the company, and I am eagerly waiting for third-quarter earnings to determine whether the momentum behind corporate earnings is intact. For more on my investment thesis for the company, please read my previous article on Upstart to which I have included a web link at the beginning of this article.

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This article was written by

Dilantha De Silva profile picture
Actionable ideas and model portfolios to beat the market

I am an investment analyst with 7 years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities. Please click the "Follow" button to get timely updates on new articles.

I am the founder of Leads From Gurus, a Marketplace service on Seeking Alpha that focuses on uncovering alpha-generating opportunities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, and GuruFocus.

I'm a CFA level 3 candidate, an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK), and a candidate in the Chartered Wealth Manager program.

During my free time, I enjoy reading.


Disclosure: I/we have a beneficial long position in the shares of UPST either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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