Valuespec: Follow my reasoning, I am a debenture holder of ECOGF. I'll be getting 9.5% interest on my $18 MM. Now, I am a vulture, so I do not really care about the company, I try and maximize my profits. I look at the company's book value and say somewhat under 4, how can I make a killing? Well, here is what I do. The debentures are convertible, of the variable conversion kind, and at today price they are convertible to somewhat more than 2.6 MM shares. Well, I go and short 3 MM shares against the block Since the average trading in this stock is about 300,000 shares a day, such a huge new supply will bring the stock down quite sharply, how much I do not know, but for the sake of the current excercise, let say to book value, or $4/share. Now let say my average shorting price (if I am really smart) was indeed 6 (and I shorted $18 MM worth of stock against the block). I take those $18 MM and buy treasuries on which I get, let say 6%, so my return now is 15.5%, but I am real pig, now the shares are $4, which with my $18 variable conversion rate (no floor, if I understand correctly) I can be short not 3 MM shares but 4.5 MM shares, so I go and short another 1.5 MM shares at $4 (and collect $6 MM bucks on which I get 6% or now a total interest return of 17.5% on my 18 MM shares). Guess what, the stock now can go to half book value or $2 share, WOW the PIG in me says, I can be short 9 MM shares, so I short another 4.5 MM shares get 9 MM bucks which I buy treasuries with ( return grows to 20.5% on the money). If I want to stop here, I call the company and ask for conversion, at 2 I get 9 MM shares which I deliver against my short position, I keep $33 MM and depends how long the process took I earned great interest on the deal. Often it does not even stop there, look at EXSO, a company that expanded too fast obtained variable conversion debentures with no floor , this was at around $2.5/share. Now the stock, which operationally is actually in better condition than it was on borrowing day, is at 1/16 bid 3/32 ask, and the shorting bandits are not finished shorting, the lower it gets the more shares they can short and all with very little risk since they can always convert at the last 5 days average closing or lower BID.
I am staying out of this one.
This stock can conceivalbly go all the way to under 1 if the management does not replace this with more rational funding, and the problem is that once the stock starts its decline, it cannot be stopped and worse, it becomes more and more difficult to obtain other financing.
Floorless variable conversion debentures should be outllawed, it is the new instrument of the reg s bandits and other fleecers of the small investor. And today, it is all absolutely legal, and I am sure the indenture document has a clause that the company cannot sue the bandits or have an injunction on them to stop shorting.
Zeev |
