Ditchdigger -- OK, I misunderstood.
You wrote:
<< Actually, IMO it is the description of shorting against the block that was the relevant point. The SEC article describe this quite clearly. Instead of covering with Reg S converted shares,one could subsitute shares from the convertible debentures quite easily. >>
Thanks. You're absolutely right. The description of how a short would profit from shorting against the block to lock in gains from Reg S shares bought at a discount was very clear and helpful.
In theory, the same technique could be used with the floorless preferreds, particularly if the conversion occurred at a discount and there were no other safeguards.
So I thought you were making a further point -- that holders of HEC's convertibles COULD & WOULD use this technique to profit from short sales. I guess I jumped to this conclusion. Sorry.
Anyway, my response -- to the point you never made -- was that in practice, with HEC's convertibles, this wouldn't happen, at least not in a way we should be afraid of:
1. For HEC's $35 MM development financings, there is no discount and HEC can convert for cash rather than shares. So the would-be short has no motivation to sell (no discount) and no assurance that the conversion will supply shares that can be used to cover a short.
2. For HEC's $15 MM of Series F Preferred, there is a 10% discount after Jan 1999, but conversion can occur only after a 15% increase in the stock price. And again, if the price is below $4.80, HEC can pay cash. So holders of the convertible can't sell indiscriminately; if they do and the stock depreciates, they can't convert. If they do sell and drive the price below $4.80, they may find themselves with cash but no shares, needing to cover. Not the risk-free Reg-S arbitrage you describe.
Side note: I wasn't kidding in my earliest post on this that I'm a complete layman, so don't anybody think this is an expert's analysis. I'm just reading the financing agreement and applying common sense. But the more I read the more I am convinced that there is no risk of Zeev's dreaded "death spiral." The more I think about the way these deals have been structured, the more impressed I am with HEC's financial management.
Joe
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