In case of floorless convertibles, how does the holder of this convertible decide how many stocks to short?
This can give us some insight on how much short selling will go on.
For example, let us say I have bought 10 such preferred convertible shares par value $100 for a total of $1000.
Now with the conditions given for conversion the number of shares I can convert into depends on the conversion price.
So if I assumed that the stock will go to 5, I will short 200 shares but if I assume the stock goes to $2 I will short 500 shares.
With ESMC, with 1.35M$ offering, with a traget price of $5, about 270K shares would be sold short (I am not considering extraneous shorting by other folks but just the shorting from convertible holders).
This itself is about 10% dilution in stock which will push it down further when actual conversion is done.
Some questions:
-Are these private placements done with individuals who can't short it below $5 or are they with institutions who can short it down all the way? also, is there any statistic on the share low achieved as a % of the price when it was offered?
-In addition to short selling by holders of convertibles, what might be a fair multiple for other people shorting the stock, when they see the news of the offering?
-In case of ESMC, I would imagine that the convertible holders would be shorting close to March 1, 1998 because it is in their interest to guarantee themselves that the price REMAINS low enough at that time so that they get most shares. If they shorted Now and the company came out with good news the price can move up and there is no gurantee or will come down after March 1, 1998 plus they have exhausted their ability to short without taking on risk by shorting now.
On the other hand, if they do not short now, they lose on the profits they would otherwise gain from shorting at a high price.
This seems like a tradeoff between immediate large profits from shorting the stock (which would push them to short as soon as they can) and the hope of getting more shares at a low price in some guaranteed way (by shorting later near conversion date at a lower price) and hoping those long shares eventually make money for them.
The former is a bearish stnad on the stock the latter being a bullish stand.
ESMC shows a volume of about 406K and I am just trying to guess if that accounts for all the short selling, my intuition is probably not.
Thanks for any comments. |
