Zeev -- you have NOT yet explained how FLOORLESS FEATURE enables the shorts to make money. Your explanation shows that the profits come from other sources.
[While I'm all in favor of moving this discussion to another thread, it hasn't happened yet. For anybody who still cares, I post the following. For the interested but impatient, the main points are at the end.]
Gator asked: << Specifically, how do the shorts profit? >>
You answered:
<< While I did not respond to these questions directly to you, I have responded to these (and Ditchdigger has as well) numerous time. I posted a URL to a posts where the floorless profit motive was given in two posts, and I have also given a detailed explanation how a floorless holding the $85 MM European debenture can profit handsomely from hedging as well. >>
In the post to which you refer, you wrote:
<< the floorless variety of equivalent securities was created for the shorts. Here is how it works (and in the floorless you can insert either convertible debentures or convertible preferred stock).
A company is with its back to the wall, all normal financing avenues are more or less closed. Finally, they meet a savior angle, and he tell them, look, we will invest in your company, but we need a "secured" position because of the high risk, and furthermore, because of the risk we want to be able to participate in the upside potential. The company says, we understand. So they structure a new deal that says, we will raise for you a convertible debenture, which eventually (long into the future and they smirk into their beard) we will convert to common stock.
So, your stock today is let say 5/8, in fairness our conversion ratio
should be at a discount to market, so we will have a "ceiling" of $.5
(not to shabby, about a 20% discount). Furthermore, to give us some
protection in case your stock falls, our conversion rate will be
variable, let say at 80% of the closing bid (average bid) over the last five trading days before conversion. Fine says the company, they really need the money bad, and of course they know that as soon as this pp is announced the stock will skyrocket. Now, that last covenant, is a "floorless", because there is no floor to price at which the company is forced to convert the debenture to stock.
The agreement is agreed and signed, the owners of the debentures
receives a piece on paper and agrees to deliver the funds within 10 to
20 days.
The deal is announced, euphoria is in the market the stock doubles
within a week to 1.125, and huge volume ensue, but lo and behold, the
stock stalls at $1.25 and does not budge. You guessed, the floorless are shorting the hell out of the stock, they have let say $2 face value, good for at least 4 MM shares (upon conversion), so they short "against" the block. If the stock rises, they do not care, they have equivalent securities. They actually hope that the stock will decline. From the weight of their shorting the stock indeed declines. But they have shorted 4 MM shares (or at least could have) giving them the $2 MM in cash that they now deliver to the company. Well, the stock drops back to its original price, where they start covering their short. This bring the price to let say, $.75, where they start shorting again. This shorting causes the price to go down under the original low to let say $.375, where they can now short even more shares (since the conversion ratio has now declined. Well, finally at .25 they start covering again. Now as they start shorting at lower and lower prices, they can short more stock since the conversion ratio increases, so at prices in the pennies (see CAFE, EXSO or CTYS for a case histories) they can short many more millions of shares and if they finally decide to stop the game (usually when the conversion will result in more than the total authorized number of shares of the company), they do their actual conversion and end up with some 75% to 90% of the company while the current holders have been diluted to a master disaster.
Note that they have never put any money into the company, they got the
public to pay for the debenture when they shorted the first time. After that they kept making profits everytime they shorted and covered lower. They control the stock at will, since they have this little instrument called a collateral against which they can short not worrying ever about a short squeeze. And to add insult to injury, by the time they are finished, they not only trippled their money but end up with a major portion of the company without ever having to risk a penny of their own. >>
Zeev, this is a very interesting story. I wouldn't for a moment suggest that something remotely like this doesn't happen. But while you have shown how a short can make a profit, you have not explained HOW THE FLOORLESS FEATURE ENABLES THE SHORT TO MAKE A PROFIT.
All of the profits in the scenario you describe derive from two sources:
1. The announcment of the financing creates a rally in the price of the common and the shorts sell into this rally; in fact, this is how they finance the purchase of the floorless issue.
2. The conversion occurs at a 20% discount to the initial or future market price, whichever is lower.
The rest is all noise.
Please note that if the buyers of the floorless do not short the stock IMMEDIATELY AFTER THE AGREEMENT IS SIGNED, then they have to invest their own money. If they invest their own money, there's no gain from any post-announcement rally.
Note too that if there is no discount (or "ceiling" price) embedded in the conversion, shorting does not automatically lock in any profit at all (except for the broker!).
Finally, a reminder: This IS the HEC thread.
The basic question is: How does this all apply to HEC?
I doubt that there is any evidence that the holders of the HEC floorless issues funded their position by shorting immediately after penning the agreements. [Zeev, do you know differently?]
I do know that there is no discount in the $35 MM of development financing, and there is a 10% discount in the Series F Preferred only in its last 3 months when the conversion price is fixed.
So as far as HEC is concerned, you ain't explained nothin'.
Joe |
