Tim -
"The Cramer article tries to touch base on what is termed a floorless convertable. This is different from the WIND convertable bond.
With a floorless the bondholder is able to reset the conversion amount if the stock price falls below a certain level. This gives the bondholders the incentive to short the stock and drive down the price. The tactic is only successful with companies in poor fundamental shape where the company can't obtain alternative financing.
Now with WIND once the price rose above $32 the bondholders may have hedged their position but they have no incentive to drive the price down."
I think you are wrong on this. Looking at the Cramer article, I can find no reference to any 'floorless convertible'.
A normal short sale will have unlimited risk and limited reward. Every such short sale represents future buying demand.
If a convertible position is augmented by a short sale, there is now zero risk, a still limited, but substantial potential reward, and interest payments from both the convertible bond itself and the short sale proceeds(generally only available to large investors and institutions). As long as the stock is above the conversion price, we have a nearly ideal investment position, no different than the floorless convertible, and no future buying power due to the short sale. If and when the stock falls below the conversion price, the incentives change to some degree, some buying power returns,but the risk is still limited.
Since there is no significant risk of WIND being driven to zero, as there would be in the case of a desperately weak company, the 'floorless' distinction is irrelevant as long as the stock is above the conversion price, and it is not unreasonable to hypothesize that the existence of the convertible MAY be a restraining factor in the stock price. JMO.
Regards, Don |
