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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: purecntry5 who wrote (7624)	11/11/1997 6:35:00 PM
From: Zeev Hed	Read Replies (3) \| Respond to of 18056

Cowboy, the floorless varietyy of convertible bonds was engineered by the "wunderkids" on wall street, when the Reg S door was closed just a little. These securities, (accepted only by companies with their "back to the wall") are designed to fleece the existing stockholders. These supposedly reduce the potential dilution to stock holders upon conversion, because the conversion price is at a discount ranging from 5% to 20% of the average last five trading days bid. So everyone think, sure the stock will go up and less stock will need to be issued. Surprise surprise, starngely enough, the stock rarely goes up, it most often goes down, and sometimes quite prcipituously (see CTYS as a a now classic example). Whathappens, you ask? Well, ket say I am floorless badit (I own the floorless convertible), and the price today is $10/share. I go and short the stock with impunnity (essentially against the block, since I have an equivalent security and a cushion of 20%). Well if enough of us bandirts short, the price goes dowmn a little, that, of course gives us the ability to short a little more stock (the box has increased because of the price decline), this additional selling causes further decline in the stock and you get a spiraling down little catastrophe. In some cases, the final dilution to existing stock holders has been worse that 3 to 1, I have seen worst cases as well, particularly with very low cost stock. If you see a fdloorless, short it if you can, bail out until the conversion is over, not before. By the way, the :wunderkids" have come up with a new variety recently, this is the preffered shares floorless convertible, the company can have this on the asset side rather than the liability (so when looking at the book you might miss the real picture), but the results are aexactly the same. Zeev Zeev