<<My understanding is they do not have to actually short the stock before converting, but in fact can have a short position from the debenture itself.>>
Let me see if I understand this myself (I hope someone will jump in and correct me if I get any of this wrong). I don't think what you said was correct. The convertible holder get to convert the debentures into stock at a certain point in time, usually at some discount from the stock price. The holder shorts the stock as soon as possible, puts the money in its account, and then covers the shares by converting the debentures into stock.
Example: the debentures are issued when the stock price is $10, the holder borrows shares, sells them and puts the $10 in his account. Assuming the price drops and the conversion is tied to the price, at some point the holder converts (let's say at $3), the holder uses 3 of the 10 dollars to obtain the stock, replaces the shares he borrowed for shorting, and keeps the $7.
It's virtually identical to shorting, but the holder usually gets to convert at some discount to the actual share price, so they are ahead of the game compared to basic shorters, and the conversion does not drive up the price the way short covering would. |
