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Technology Stocks : Amazon.com, Inc. (AMZN)
AMZN 230.62-1.7%10:02 AM EST
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To: Glenn D. Rudolph who wrote (118808)2/28/2001 12:11:55 AM
From: Alomex  Read Replies (2) of 164684
 
Could you please elaborate on what is a "toxic deal?"

It usually applies to convertible debt under some very unfavourable terms. Here's the precise definition:

internetstockreport.com

Convertibles: Here, an investor gets a security that can be converted into common stock. This security may be a preferred stock, which gets higher priority than common stockholders if there is a liquidation. Or, the security may be a debenture or note; that is, a debt instrument that has a higher priority than preferred stock.

The conversion price of the convertible - the price that an investor can swap it for common stock - is at a premium to the market price. This can range from 5% to 20%.

Some convertibles have reset provision. In other words, the conversion price falls as the stock price falls. This can set the stage for a death spiral. For example, the investor can short the stock, as the reset price falls, and then swap the convertibles at the reduced price. This can be extremely lucrative. Unfortunately, the stock price will get pummeled. It is for this reason that convertibles are often referred to as "toxic convertibles."

True, some convertible deals have "no-short" provisions. But this is little comfort. You see, it is easy to set up offshore funds to handle the short-sales. It is virtually impossible to track.
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