IDBEF's Floorless Convertible Preferred
Notably absent from this thread is any specific comment on the legitimate motives of issuers of "Floorless Convertibles" -- although drjoedoom does allude to their existence in his posts. My particular interest in this subject derives from the mention here of ID Biomedical ("IDBEF"), a company in which I have an interest.
I'll not claim that "floorless converts" don't have certain unpalatable aspects from the issuer's point of view, but rather consider why a company, specifically IDBEF, would issue such a security in the face of those inherent, potential disadvantages.
IDBEF, like may biotech companies, is essentially a collection of on-going research projects that consume cash, hopefully, on the way to developing commercially viable products. In the interim, IDBEF is cash flow negative and thus unable to access the conventional debt market. This leaves equity or converts as the only logical sources of finance.
Since management expects to finalize product distribution deals in the coming weeks and expects to generate significant revenues from product sales early in 1999, they are reluctant to do a straight equity deal at today's stock price. Hence, the appeal of a convert to IDBEF. The "floorless" provision of the convert is necessary to address the purchaser's unalterable requirement for a clearly defined exit strategy should management fail to deliver.
A number of factors mitigate the risk of this convertible. The institutional investor also received 300,000 warrants. This investor has much more to gain from an increase in IDBEF's share price than it would from a decline. Furthermore, the private placement was not a stand-alone deal, but rather, one issued in conjunction with a sponsorship arrangement between IDBEF and Century City Securities and Value Management and Research. The sponsorship is designed to bring a new audience to IDBEF at a time when significant corporate developments are in prospect. Since Century City and Value Management and Research are being compensated with 500,000 warrants, it is highly unlikely that they would involve an institution intent on damaging IDBEF.
If IDBEF delivers on its expectations, then the issue will probably convert over the course of its term or be called for redemption without any adverse effect on the company. Should management fail to deliver, this convertible will be only one of their problems.
Regards,
Neil |
