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Strategies & Market Trends : Floorless Preferred Stock/Debenture -- Ignore unavailable to you. Want to Upgrade?

To: mst2000 who wrote (917)	8/29/1999 11:12:00 PM
From: Zeev Hed	Read Replies (1) \| Respond to of 1438

Mark, when Rose Glen puts $20 MM in ASTN, I presume he also assigned a person the duty to follow up with ASTN so he knows better than ASTN's management what its prospects are. Nevertheless he has decided to put in the future floorless clause. That indicates to me that some uncertainties are present. To your question about the impact of future conversion with or without the hedge, you are right, if the hedge was not set and conversion is exercised for the purpose of selling, selling pressure upon conversion would occur then, rather than now. You got to ask yourself, however, if Glen can get within the next few weeks something like $11 to $13 per share (and it will take some time to double the short position from the current 2 MM to a future potential 4 MM, a good reason to delay the set up of the floorless for six months to allow setting the hedge), should they not sell short against the block and continue collect interest with no more money at risk? Then, if the prospects appear to brighten, use declines to cover, and if prospects are less than brilliant let the stock drift and then handle it like any other floorless (continue shorting below the ceiling). Shorting above the ceiling involves absolutely no risk and immediate profits. The only risk is the loss of opportunity if ASTN "blows up". As for your second question, no, the setting up of the hedge requires absolutely no additional money, "au contraire" they get all their money back, and then some if they short above the ceiling. The reason is very simple, when shorting, all you need is to deposit with the broker 50% of the value of the stock you short (and big institutions get paid interest on this deposit). In the case before us, Glen does not have to deposit cash if he is depositing a much better collateral, the convertible debenture. The brokerage house will be more than happy to hold the debenture as a collateral since now it (the "house") bears absolutely no risk. (In a normal short position, the "House" requires you deposit 50%, but if the stock increased by 50%, you'll be asked to increase your deposit, or they'll buy back the short position, and they will use your whole 50% deposit together with the money you received for the short sale, they do that before you run down to "no collateral". However, here and there, you get stock blow ups that gets the stock up so fast the collateral is not sufficient, and in these rare cases, the "house" can be left holding the bag, thus they have some risk. In the case that they hold the converts as collateral, no such risk exist. I believe that your third question is a rewording of the first. In any event, the major point here is that Glen can establish a short position with "impunity" without creating a reservoir of future demand as a result. Thus, one would expect that his "man on ASTN" will advise him of the progress and how the market will evaluate that progress and he will act to minimize market risks for Glen. A premium of 20% to 30% above the ceiling should (unless his "man" says otherwise, due to, as you called these, intrinsic conditions) trigger shorting because for that portion shorted , all risks is removed and the interest rate becomes infinite. Zeev