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Strategies & Market Trends : Roger's 1998 Short Picks
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To: Mark H. Bornfeld who wrote (927)1/18/1998 3:08:00 PM
From: Roger A. Babb  Read Replies (4) of 18691
 
Mark, Yes floorless means that the conversion price does not have a floor (but often does have a ceiling) and is set at some percentage (usually about 85%) of the previous weeks price. This means that the holders can not lose unless the company is de-listed. But the larger problem is that the holders can short the stock, and just keep increasing their short position as the price falls and their share entitlement increases. They do not have to ever buy to cover, but can cover the short position by converting. It is in their best interest to drive the price down, and often company mangement is in cahoots with them. The fall continues until the price is under $5 and can no longer be shorted. The holders then convert and the price falls again as the new shares are dumped on the market.

Sometimes these stocks rebound a bit after the holders finish converting and the new shares are all dumped (Zycad/GATE is an example) but one must be careful. Management that has a history of taking advantage of its stockholders with such a deal is likely to repeat the performance.

Floorless convertibles are extremely profitable (often over 100% including short profits) to the holders and are almost risk free to the holders. It puts cash in management hands for salaries and deals. It makes big money (usually over 50%) for short sellers like me. And all of this money comes out of the long stockholders pockets. In my opinion it should be illegal.
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