If it's a floating convert, let's do the math with this example !
A company with a negative business outlook issues $10 million of convertible preferred stock to a group of 25 investors. After a 45-day holding period, the preferred shares are convertible into common stock, whenever an investor chooses, at a conversion price that is 90% of market price at the time of conversion.
At the time of issuance, the company's common stock is selling for $10 a share.
One group of investors immediately begins short-selling the company's common stock. The stock's short position soars, and the selling activity drives its stock price down. Other preferred stockholders panic and convert, selling their common shares and driving the stock price down even further. The short-sellers cover their positions as the stock price descends, pocketing the difference between the current price and the price at the time they initiated the sale.
The stock price hits $1. The short-sellers cease their selling activity and convert their preferred shares at 90% of the market price, or $.90. They cover any remaining short positions with newly converted common stock. In addition to the profits from their short sales in a declining market, the investors earn an automatic $.10 profit per share that they sell upon conversion. If they hold on to their investments and the company recovers, they will own a large percentage of its outstanding shares.
From last paragraph of: cfonet.com
<Edit: With a $5 floor on the warrants, above example doesn't seem to apply in this case, oh well ! |
