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Technology Stocks : Westell WSTL -- Ignore unavailable to you. Want to Upgrade?

To: Steve Marsel who wrote (18060)	2/20/2000 11:05:00 AM
From: Rich Wolf	Respond to of 21342

Steve, maybe I can help re: the convertible bonds, as my friend Gary is usually offline on Sunday mornings. The bonds are converted to common stock at a price which is a complicated function of the stock price at various points in time. There were to have been windows during which this conversion could be repriced. Most of those clauses will become irrelevant once the TLTN acquisition is complete, since the cash WSTL will then have will allow WSTL to call the note from the bondholders. The bondholders have already 'hedged' the shares, from our observations of level II trading. This means they sold short a quantity of shares equal to the number they will obtain upon conversion of the bonds and a 'cashless' exercise of the warrants... or at least, almost this many shares. It will be in the bondholders interest NOT to let WSTL buy the note back for a small premium, since the bondholders actually hedged for a much more lucrative return. (i.e., they shorted at prices ranging from $9 to $12 before letting the stock run, then came back higher and hedged more of the warrants; but the conversion will be at $5.92 per share; hence the average return for them lies somewhere between 50% and 100%.) Hence, WSTL won't need to actually buy the bonds back, but will go through the formality of calling it back, which will force the bondholders to convert, thus closing the deal for good. However, the bondholders really have no incentive to close their short position, even after they convert. They have no capital tied up, since they hold a large short position on one hand, and will hold an equal number of long shares on the other hand. They will continue to collect interest on the short position. Hence, apart from wanting to just 'get it off the books' they may let it hang out there for a year or two. For this reason, we will continue to see a large short interest outstanding for WSTL until the bondholders close their position, but the component which has been hedged is truly 'irrelevant.' PS Note from recent SEC filings that the bondholders have converted some of the bonds already. We believe it was because they wanted to hedge against the warrants, but were unable to obtain shares to short. Hence they sold some of those long shares directly against the warrants, leaving some of the previously hedged short position now unhedged. However, at some point in time they will exercise the warrants, and the shares obtained by such exercise will serve to hedge that short position. A cashless exercise allows them to receive fewer shares than they have warrants for, but they no longer need to put any money up; normally, they would have to pay $5.92/sh to exercise the warrants; my observation of Castle Creek is that for the near-term, they prefer to not invest any capital; but given the much higher stock price at this time, they may have decided it would be worthwhile to sell against the full number of warrants, so may actually do the full exercise. Aside: this may be the reason for the occasional reappearance of the MMs INCA and REDI on the ask, as CC may have decided to (pre-)sell more of the warrants. It is indeed complicated. You may want to check the original SEC filings for the details of the original terms, which I have left out as they will be unimportant once the bondholders convert. Hope this helps. Regards, Rich