More on Castle Creek incentives to short now.
Paul, you state: " In practice, the earliest one would expect a conversion is probably mid-February. It is during this period that many 'fear' a Castle Creek shorting blitz. Some on this thread and Yahoo have implied that Castle Creek benefits from shorting the stock down before that time. This is nonsense."
Zeev, you wrote: The only risk they face, is losing the potential appreciation of VLNC in the event it does meets it goal and the stock rockets as some on this thread believe. All I can say is, quite possible, but faced with the certainty of a profit of 30% now and future interest of 6% on their investments, without any of that money now being at risk (they got paid back when they shorted, thus they get from here on 6% on no invested money, or an infinite interest rate), they could very well decide that two birds in the hands are preferred to one on the tree.
My thoughts: Sure they can short 1.24M shares against their position, and if they are unsure of the company and their original investment, then there are good reasons to do this. But its not a 'shorting blitz', of 5M-10M shares like some have indicated, and wouldn't necessarily start a death spiral. If they short more than 1.24M shares, then they take the risk of a stock price rise on the additional shorted shares, excepting as adjusted for the warrants.
Its not true that the only risk they face in the case of a rising stock price, is losing the upside potential on the eventual conversion of the preferred shares. They also received 447,761 warrants with an exercise price of $6.7838 per share good until July 2003. At a stock price of 8, these warrants have intrinsic value of $1.21 per warrant, and time value of at least 2 dollars. So at the current stock price, these warrants should be worth at least $3.21 apiece, and the total fairly valued at $1.4M+ If the stock craters, these warrants will become worthless.
If the stock goes to 15, these warrants will be worth at least $3.7M. That plus the preferred shares will be worth $18.6M, for a total value of $22.5M. Not bad for a $7.5M investment.
I find it difficult to see how Castle Creek benefits greatly from shorting before its clear the company won't get a contract. I can easily see how Castle Creek makes a killing with a rising stock price.
I think the fears of the variable conversion are way overblown. If Valence doesn't have a customer interested in buying their batteries, the Second Closing might not happen, and the company runs out of cash about the end of the year. This is the more immediate concern.
My guess is Berg, Shugart, Roberts, and Dawson, will look out for their investments, and neither of these scenarios will come to pass. But if you want to worry about the variable conversion issue on existing preferred shares, and calculate all kinds of doomsday scenarios, have at it. Enjoy yourself.
Paul |
