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Upstart: 15% Yield On Convertible Bonds

Aug. 01, 2022 2:12 PM ETUpstart Holdings, Inc. (UPST) Stock70 Comments


  • We wrote on how Upstart's massive bubble would ensure that the company would become extremely cheap.
  • It has certainly become cheaper since then.
  • The convertible bond pricing suggests a severe form of distress and investors are doubting even the viability of the firm.
  • Looking for option income ideas that focus on capital preservation? I offer this and much more at my exclusive investing ideas service, Conservative Income Portfolio. Learn More »

Credit Report Paper with Coffee


When we first covered Upstart Holdings Inc. (NASDAQ:UPST) we were skeptical of its potential in providing investors with good returns. Despite the stock drop, we saw the journey still unfolding for our fledgling value play. Specifically we said,

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This article was written by

Trapping Value profile picture

Trapping Value is a team of analysts with over 40 years of combined experience generating options income while also focusing on capital preservation. They run the investing group Conservative Income Portfolio in partnership with Preferred Stock Trader. The investing group features two income-generating portfolios and a bond ladder.

Trapping Value provides Covered Calls, and Preferred Stock Trader covers Fixed Income. The Covered Calls Portfolio is designed to provide lower volatility income investing with a focus on capital preservation. The fixed income portfolio focuses on buying securities with high income potential and heavy undervaluation relative to comparatives. Learn more.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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Comments (70)

Ian Bezek profile picture
Good call. Dreadful report. Real question if the equity has any value. These bonds should be yielding 20% tomorrow.
Trapping Value profile picture
By far the most horrid report you could expect, in my opinion. Trading still halted. Would not be surprised by a huge tank, but 35% short interest is the other side.
Persaltish profile picture
This company is like giant Ebola-infested turd. If you touch it, it will kill you. If you even get near it, it will kill you. If you repeat the name too many times, it will kill you.
The Clairvoyant profile picture
This is an excellent article, it’s rare for me to find a legitimate opportunity from SA, often entertaining, but rarely actionable. I will look at these convertibles because I think the business of helping banks measure credit risk is boring at best, and completely unnecessary at worst, but I also don’t think the company is going bankrupt in the next 5 years. I’d buy these with absolutely no expectation that they mature in the money, only that they will be repaid at or near par. I have to do a little work here, but thanks for the very interesting idea.
Trapping Value profile picture
@The Clairvoyant Thanks. If you are bullish the company, this a great risk adjusted play.
Sunil Shah profile picture
@Trapping Value

for a share that you claim investors are 'SHOWING A COMPLETE LACK OF BELIEF IN THE VERY SURVIVAL OF THE COMPANY' ...
it is acting rather strangely, don't you think?
What is your valuation of the company, not the convertible bonds, but the shares ?
thanks in advance.
Sunil Shah profile picture
and you think it's worth $9/share
Don't you see an intrinsic contradiction...
How do you reconcile the two?
Trapping Value profile picture
@Sunil Shah No I see no contradiction in my outlook differing from what the average investor buying convertible bonds is pricing.
Sunil Shah profile picture
@Trapping Value given your extreme view of Upstart, where you claim in this article is about to go bankrupt,
What is your valuation of the shares?

According to you as far as I can tell, as the mkt value of $661m of bonds currently is yielding in the mid-teens, its equivalent to saying investors are 'SHOWING A COMPLETE LACK OF BELIEF IN THE VERY SURVIVAL OF THE COMPANY'

Do You think the convertible bond ytm is implying the company is about to go bankrupt...?

Pls clarify your opinion on this article
thanks in advance.
DONTIGNY profile picture
For anyone managing money, your own or as a fiduciary, these types of positions are really hard to manage.

The burst of volatility can cut your monthly P&L, long or short.

To seize things properly, are you going to waste your time and focus on a 2% long or short position?

If you see potential, stick to your guns. If you hate it, move on.

Certainly I had to stop wasting time on these small positions, even if i hold these. The macro trades are red hot. What's moving your P&L ? :)
@Life's good I agree I figured this a while ago I don’t waste time on small positions either I invest big or not at all. It worked for me. Anything 2% is a waste of time to manage maybe just maybe at least 4% or 5% ? Most of my positions are much higher though is either I know what I am doing and if not I don’t invest.
@Life's good

What are your top 5 positions now?
DONTIGNY profile picture
Large caps in S&P, playing the rebound of the S&P with Costco, Accenture, Nvidia and Union Pacific.

I also have a large USD exposure, which has been impacted in last 2 weeks by risk on momentum.

For the small caps equity, i let them sleep, i treat them as call options (leaps) without expiration :)
Sunil Shah profile picture
I take issue with numerous of your statements.
One the company embarked on loans on own B/s in Q1, realised the market reaction, and removed them. Your narrative is a highly sensationalist version of events.

"The company cut its revenue guidance sharply and this was a 25% drop from its from its previous guidance. It also projected a loss around $30 million in the quarter, a number more than 7 fold its worst case estimate a few weeks ago."

The company guided from a profit to a loss for q2. There is no quantum dot that change: where on earth do you derive a "7 fold worst case scenario".
It appears the objective of this article is to titillate rather than inform
Trapping Value profile picture
@Sunil Shah Oo la la.
This should be fun.
1) So your claim is that large cap company putting loans and taking them off, based on market reaction, is less sensational than me saying they did?

2) www.theglobeandmail.com/...
" net income loss expected in the range of $31 million to $27 million compared to previous guidance for a net loss of $4 million to $0 million."

I do like to titillate, but just a shade after I inform.
Sunil Shah profile picture
@Trapping Value we certainly do!
From a small adjusted profit to a small adjusted loss we have a company that has a "0SEVEN FOLD INCREASE IN LOSSES!!!"
Titillatiion personified.
As for your statement.
'At the current price, investors are saying that these $600 m bonds are worth less than $375 million'

Please elaborate how you come to that conclusion
Trapping Value profile picture
@Sunil Shah Math. Current price x par outstanding.
Naples Investor profile picture
I have a decent sized position in UPST and I am down about 45%. I would love to get into these but I just read the rules for 144a and I simply don't see how to qualify.
Millennial_Tyler profile picture
With legalized gambling and sports betting everywhere its beyond me that 144A rule is still in place. Indefensible
@Millennial_Tyler do we have a Cusip?
DONTIGNY profile picture
I would buy if I would qualify ! Great for a second to move away from equity discussion. Any good SA author on distressed debt ?
Do the bonds have a CUSIP?

It feels like this author doesn’t understand the business model. But appreciate the heads up on the bonds.
@knoxmarlow Can you if you don’t mind explain more ?
Trapping Value profile picture
@knoxmarlow The bears and Skeptics have been told for the last 96% of the decline that they did not understand the business model. We all understand what the company is saying and this AI fueled concept is hardly new. We just don't believe it will do better than traditional methods.
@sbwiad33 Anything in particular? There are a few "deep dive" articles on Upstart. Or are you wondering about the bonds?
Krypto profile picture
Fidelity doesn't trade the bond and Ameritrade didn't show it in a search, unfortunately...
Trapping Value profile picture
@Krypto It is the 144a rule.
Krypto profile picture
@Trapping Value So I would need to be an institutional investor?
I'm a little short of the $100 million requirement...
Any idea how to buy these if you meet the requirements? Cant find anyone quoting

Maybe this lack of liquidity contributed to the price decline
Xxfactor profile picture
Ya but it went to 60 plus after your coverage before dropping back down. I don't think it's surprising at all bond holders are trying to get out. They are completely driven by anxiety and fear.
UPST only has 60 bank partners and a whole new auto lending market to get into. There is plenty of runway for growth. I will def be paying attention to earnings though.
Trapping Value profile picture
@Xxfactor Bond holders tend to panic less, especially when the balance sheet is strong. Rare to see such panic when net cash outweighs debt. I think you know what those people must believe, although I personally doubt that conclusion.
How did these .265 coupon bonds come into existence ? Presumably the premise at time of issuance was that they would be converted to stock in the future .Looking towards the future perhaps a capital re-org will be proposed whereby the bonds will all be converted to stock based on some new exchange ratio.
Trapping Value profile picture
@Pennydredful Everyone believed their own hype. Management also spent some $56 million to hedge dilution risks via some call purchase arrangement.
Good call, “but funnily…”
I am no expert on UPST or its Bonds but I smell an excessive amount of pessimism here, if UPST is going to go out of business in 2026 then mark down 25% of all the stocks going out of business as well including all Travel stocks like Carnival, the airlines, etc ... Something is telling me this is so pessimistic that an opportunity is brewing where there is fear one should be greedy indeed and buy the stock. Their revisions have been so badly hammered that it is very likely they are going to surprise on earnings and beat earnings and change tone for a better outlook. Think also this in this economy when people are struggling they need to refinance and consolidate debt, isnt this heaven for company like UPST ? Just saying.
Trapping Value profile picture
@sbwiad33 If you can buy the bonds, and you are bullish, it is a good play.
Xxfactor profile picture
@sbwiad33 I certainly loaded up at this price but it's not like I have never been wrong.
Ouch! Say TV. As I understand UPST retained some of its loans on its balance sheet, presumably to do research. This seems to me to be lame excuse for banks tightening up their credit exposier by preserving capital in the face of a downturn. Because UPST investors threw a temper tantrum, then UPST decided to get these loans off the balance sheet, even at a loss. I wonder how much UPST malaise is an UPST model problem or simply that banks stoped lending freely. Banks never say that they’re out of money, and not lending, they just refuse your loan. Whats your take on this and credit market freezing up?
@mac ron I never understood this. First UPST tells us that their method is proving better results (lower defaults) than FICO. Then they panic and sell the loans they had on their balance sheet with a significant loss. If they really had better quality loans, then they should just have held them to maturity and used the results as PR. Or they knew they would need the cash, which means worse is yet to come.
@visualzero The management team clearly fumbled by using too much balance sheet capacity while originating the loans. But selling the loans to re-set the balance sheet wasn't "panic." The market was telling management that it didn't want Upstart to use its balance sheet; and management responded accordingly. The actual realized loss was a tiny fraction of the market cap lost as a result of the fumble.

In other words, it was rational to liquidate the loans and re-set the balance sheet after the initial fumble. The initial fumble was unfortunate. The important thing is to see how management is learning from its mistakes going forward. Will it continue to make unforced errors? Or will it do better? Time will tell
SnufferBottle profile picture
If UPST is GAAP profitable at all 2023 & beyond its significantly undervalued here.

We'll see how it plays out. Recessions apply pressure that turn some financial services companies into diamonds and others into coal. If UPST's loan loss models show significant savings for banks during the downturn they'll come out substantially stronger from this. If they lose even more than FICO predicts, then they have some serious problems.
@Snuffer Totally agree. It all comes down to whether their AI is better than FICO. I'm betting it is.
@ssegrest2 it would be more surprising to me if it was worse…wouldn’t shock me but I would bet that upstarts is better
@ssegrest2 Technically ML(i hate using AI) can generate better outcomes because it can use a lot more variables. However that doesn't mean there are not missing variables and whether their calculations use relevant or use up to date information. To many times have I seen smoke and mirrors to make something seem plausible, only for them to take shortcuts. Its technically no different than the insurance business...
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