Crossy, I think that at this stage it is of paramount importance to undersatand the capitalization of CTYS.
There were some 30 MM shares, and recently another filing for 10.5 MM shares has hit, I take it these are new shares, not related to the the preferred convetibles. So right now we can count on about 42 MM shares.
It appears that in the last six months two preferred convertibles issues were issued, each with a face value of $50,000,000 and each with a floorless conversion rider.
First, we should all realize that a company must be with its back against the wall to accept a floorless clause in its preferred or other convertible debt.
Now let us try and get into the shoes of the holders of these floorless converts (and I have perused to S-3 to find the normal culprits like Meyer and Shaar, and have not found them, but they all know the same game). In the following I will assume that none of these preferred have converted yet. I am a holder of the preferred debt and I am worried, the stock is plunging and the debt has been downgraded, some of us, may be forced to sell this debt because it no longer bear a B or better rating.
What do we do?, well, we happen to have $100 MM worth of equivalent equities of CTYS, at the current market value of let say $6/share, this is equivalent to 16.6 MM shares. We can start and short the stock and get paid our money now, after all, if we short that much stock (which right now, seems to be impossible with a float of only 10 MM shares, since about 20 MM shares are still restricted) the price will decline, to let say $5 a share (at this price we can increase our short position to 20 MM shares). As converts holders, it is actually our intyerest to see the price declining as low as possible. Why, at $1/share, we can own the company upon conversion with 100 MM shares.
Since the quantity of equivalent shares we hold is overwhelming in term of the current capitalization, we really control the situation pretty well. We can short with impunity, since we can always deliver upon conversion the actual shares we have shorted.
So what is the best strategy, well we do not need to short our whole position (nor can we, there is probably a limit of about 8 MM shares we can short right now, and if the 10,5 MM new shares are counted possibly another 5 MM shares for a total of up to 13 MM shares. We have already managed to get the price down nicely from 10 to 6 (and the company has helped us with the screw up in the UK, as well as with Moody ans S&P downgrading our debt).
Now comes the neat part of our strtategy, when we short the stock we get paid cash (since we are collaterized with our debt), this cash can work for us (we no longer have our cash tied in the preferred) to do for instance additional shorting beyond our holding of the preferred (zut, that is no good we have too much of the preferred to short anyhow). Not only that, our shorting keeps a constant pressure on the stock.
FRankly, if we wanted, we could get the stock so low that there would not be enough shares authorized upon conversion (the EXSO scenario).
How far will we go? Well a rational bottom would be the number of authorized shares upon conversion. Anyone knows by any chance how many shares are quthorized?
Zeev
PS. Sorry for the lengthy message, but it will be tough to identify the bottom here. I would guess a day of 5 MM shares with a price reversal could be a signal. |
