Well, I was wrong. Corel pulled off a toxic equity deal.
The amount ($C15M, roughly $10M US) is almost pathetic though -- only about 4% of their market cap. It used to be (a year or more ago) that a desperate company could easily raise 10%-15% of their market cap with a toxic equity sale (albeit at a potentially terrible price to their existing shareholders, dilution-wise). I guess that we're still sorta slow and cautious with these things up here in Canada, eh?..... ;-)
What are the implications of this to Corel (the company) and to existing Corel shareholders?
This is probably better for both than a bankruptcy, however the price to be paid will likely be steep.
Now Cannacord must sell (short) at least $15M (CDN) of Corel shares over the next four days -- and, the price almost doesn't matter, since the deal is structured to essentially guarantee them however many shares they need for this, plus 11% or so (that "90%" bit). If they short "a bit too much", or if the stock unexpectedly rises in price after the four day pricing period, they can always exercise their option for up to $7.5M more (sort of stock at the same terms -- 90% of the four day average closing price).
Note the perverse incentives here. The lower the close price for each of the following four days, the more stock Cannacord gets. This means that they benefit financially from selling pressure at the end of each of the next four trading days. And the rest of the market knows that, too -- it's essentially an "open secret". Others can (if they feel like it) "tag along" or "pile on to" Cannacord's trade by (short) selling through the day, and perhaps covering some at the end of each day at a price that others might be conspiring to pound down.
It's almost a recipe for a "can't lose" shorting frenzy, eh? That's why this sort of thing is called "toxic" or "junk" equity, or "death spiral" financing....
- Daniel |
