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Gold/Mining/Energy : Harken Energy Corporation (HEC) -- Ignore unavailable to you. Want to Upgrade?

To: Ditchdigger who wrote (3186)	7/10/1998 12:42:00 AM
From: drjoedoom	Read Replies (2) \| Respond to of 5504

Ditchdigger -- not an example relevant to HEC! You state: << The relevant strategy involved . . . purchasing for cash securities overseas which had been issued at substantial discounts >> Your example: << The Fund purchased 300,000 Regulation S shares from Zitel on December 12, 1994 at a discount of approximately 15% to the freely tradeable share price. >> The key to making this strategy work is that the unregistered securities are bought at a SUBSTANTIAL DISCOUNT to the "freely traded share price." It that case, the buyer of the discounted shares can obviously make a profit by shorting the freely traded shares. But that example has little or no relevance to HEC's convertible preferreds: 1. No relevance: HEC's $35 MM of development financing have no discount. Period. No opportunity to lock in gains by selling short, as far as I can see. 2. Little relevance: HEC's $15 MM of Series F Preferred have a 10% discount between Jan 1999 and April 1999. This means that buyers of the preferred can lock in 10% -- in early 1999 -- by converting and shorting. The terms stipulate, however, that before exercise the market must have appreciated 15% within the last few days or weeks. So while the preferred holders can make 10% -- not an unreasonable return on their funds -- they can't precipitate the "death spiral" that Zeev warns us against. Moreover, the holder who hopes to lock in arbitrage profits always has the risk of a short squeeze. If the stock price declines below $4.80, HEC can pay off in cash rather than shares. The convertible holder who shorts at, say, $5 a share may find that after the stock declines to 4 3/4, he gets paid not in shares but in cash, forcing him to buy the shares in the open market. That's not so bad for HEC, which pays $15 MM in cash (yeah, yeah, plus interest) to redeem $15 MM in outstanding preferred shares. It might not feel so good to the short, however. You tell me whether you'd like to be short 3 MM shares at $5 (3 MM x $5 = $15 MM) with the stock at 4 3/4. Try covering that short at a profit! Even if the short does make a profit -- covering, perhaps, at an average 4 7/8 -- WHO CARES? There's no dreaded "death spiral." That's the critical point. When I asked, "How does the short make money?" I didn't mean, "How does the short make a tiny profit by locking in gains on purchases of discounted shares." As a HEC shareholder, this question doesn't concern me. I meant, "How does the short make a huge profit by shorting shares in such quantity as to create Zeev's dreaded death spiral?" This question remains unanswered. Thanks. Joe