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Strategies & Market Trends : Due Diligence - How to Investigate a Stock
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To: Mary Baker who wrote (238)4/25/1999 12:39:00 AM
From: Henry Volquardsen  Read Replies (2) of 752
 
Mary,

It depends on the nature of the convertible. Most convertibles are straight forward. They have a fixed conversion and no real problem. However there is a species of convertible that has variable conversion pricing. You see this done with very risky credits. The investment banker will demand downside protection in the form of a conversion price that is adjusted downwards if the price declines. The negative of this type of financing is that, at least theoretically, it allows for stock manipulation. The way it works is someone buys up the issue and then shorts the stock. If the stock goes up no problem, he just exercises the convert. But if he can get the stock going south he can lower his conversion price and get more stock. This encourages him to short even more than the size of the issue and can almost become self fulfilling. These deals are potentially very damaging to the shareholders as not only is there a large price decline but there is massive dilution at very low prices. I have never been in a stock where this has happened but that is the theory as I understand it. I don't know what type of convert RRRR has. There are two threads on this type of financing. I don't post on these threads so I don't know what the quality of the info is like.
Subject 22494
Subject 19082

If you can link in a post in which someone mentions points 2 and 3 I'll try and take a look at what they are referencing.

An Auditor using a phrase like If RRRR can remain an ongoing concern sounds a bit severe. Accountants usually use very cautionary language but that seems a bit ominous. Do you have a bit more of the paragraph it appeared in so we can get a bit of context.

Henry
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