Ditchdiger. The floorless are continuously evolving. The advantage to the stockholders (relative to the old Reg S which took for ever to know they were in "progress") is that the company must disclose these quite rapidly. I am not sure how rapidly however. Investors reading the documents have a chance to determine if a floorless security will be excessively dilutive or not. How money is made by floorless bandits was described in:
Message 3637974
As for HEC, I decided to try and see if I can find more info, and particularly understand the $35 MM. It is not a preferred floorless (like the $15 MM) nor a floorless debenture. I do not have access to the actual "Development Finance Agreement" and the 10Q and the May 27th S-3 forms are not exactly the same (for instance in the S-3 I could not find the $4.8 clause for either the $15 MM or the $35 MM, but that is of little importance, since, if HEC has the funds and wanted to buy back either of these instruments, it seems that this option is always open, albeit at an interest rate of 25% for the former). The S-3 no longer mentions the 7% of Harken net profits, but just "future payments". These future payments appear to be the "Participation", and thus, to the extent that such payments are made (within 2 years?) these are substracted from the "Payment Amount" (which is convertible in a floorless fashion into stock). Thus the interest rate is (compounded monthly) 15% if the floorless bandits decide to convert and 25% if HEC decides to force conversion or pay cash.
The conversion ratio depends solely on "the market price of the common stock" on the day of conversion (page 4 middle of first paragraph). I do not know how these $35 MM are accounted for in the balance sheet (equity, if it was a preferred stock, or debt if it was a debenture).
In the S-3 there is no mention of who are the Institutional Investors (Friends or foes, but I must caution you that in one prior floorless case, one of the major holders of a floorless debenture was the President of the company, so "Friends or Foes might not be applicable in these floorless securities). The $15 MM's lion share is owned by RGC and it is a straight forward floorless. As far as I can determine, the "Market Price" is the lowest of two conditions in a period of 22 trading days prior to the conversion. The difference between the first six months and later is that in the first six month, apparently, conversion cannot occur unless a rally of 15% above the lows (five days lowest bid) has occured and thereafter (after Jan 9, 1999) conversion is simply at the lowest of the average 22 days prior to conversion or the 22 trading days prior to Jan 9, 1999. Thus, if these were the only floorless from here on, the best time for an outsider to buy could very well be during the last three weeks of December 1997. Well, assuming that no other momentus events occur.
Unfortunately, while reading the said S-3, I discovered that the recent European debenture (5% interest $85 million senior convertible debenture issued May 1998, maturing in 2003), is in essence a possible "long term time bomb", after November 26, 2002 (At Harken's Option), the debenture is convertible at the then market price (if it is lower than $6.5). With a premium of 10% (quite regular). The interesting clause, which I think should raise some eyebrows, is that if on maturity, the total capitalization of Harken (stock outstanding times price) is less than $500 MM, then the premium goes to 115%. Now the premium is not inordinately high (I have seen 20% in such floorless convertible as well), but the $500 MM capitalization is interesting. HEC already has, accorcing to my calculations, close to 152 MM shares (to the 130 MM outsdtanding in May I have added the registered 5 MM in the S-3, May 27, 3 MM in the S-3 June 17 and close to 14 MM in the S-3 of June 27). A capitalization of less than $500 MM means that if the number of shares has not increased, a price of $3.3/share is assumed, for which this specific contingency is designed.
I tried to pull the June 27 S-3, but it crashed my computer after unloading the first few pages, tried three times and gave up.
To summarize, Ditchdigger, it seems, at least on the surface that the total size of the future floorless instruments of HEC is $135 MM. For a company with a current capitalization of about $600 MM, I think it is quite horendous. EXSO fell on its face with a floorless of about $3 MM with an intial capitalization of $30 MM (there were about 15 MM shares and the initial price was $2/share on my intitial warning abandon ship there, we all know what happened since). All that you need to initiate a bad death spiral during the next few years is a string of dry wells, or another drop of a buck or two in crude.
I am sure that there are a lot of arguments why a catastrophe of the size taken by other floorless would not happen, but the major point of all this analysis is to remember that people lending money to fledging outfits do not have "Good" or Bad" motives, they have only one motive, optimize their returns, and the welfare of existing share holders is not part of their profit maximization equation.
Zeev |
