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

To: Zeev Hed who wrote (245)	2/9/1999 2:00:00 AM
From: Jeffrey S. Mitchell	Read Replies (1) \| Respond to of 1438

Re: Junk Equity Deals Can Harm Stock, from the National Law Journal While a 'floorless convertible' offering can help a struggling company, the floating conversion feature is potentially ruinous. BY ROBERT C. FRIESE AND JAHAN P. RAISSI The National Law Journal (p. B07) Monday, February 15, 1999 IN THE 1980S, troubled companies often turned to junk bonds as a source of last-resort financing. More recently, small, struggling public companies that cannot raise capital through traditional means have turned to a relatively new type of security, which, depending on one's point of view, has been called a "floorless convertible," "toxic convertible," "death spiral convertible" or simply "junk equity." Although these securities can be a boon to a struggling company, they can also be the final nail in its coffin if not structured properly. Abuses of these securities are causing substantial losses to the investing public and great harm to many companies that rely on them for financing. <snip> Like many other seemingly good ideas that often don't work in practice, the concept of floorless convertibles is theoretically sound. Given honest, nonmanipulative market activity in the underlying common stock, when properly structured the capital raised in an offering of floorless convertibles can allow a struggling company to realize greater shareholder value. Unfortunately, the history of these offerings has shown that the results are often ruinous for companies and their shareholders. This has become a serious problem since this type of security has grown to an annual billion-dollar-plus cottage industry for certain of its promoters. The source of most of the recent problems with floorless convertibles has been the floating conversion feature. If the market price of an issuer's common stock declines, the floating conversion feature can result in an unexpectedly large number of common shares being issued at conversion. The release of large quantities of common stock into the market can significantly depress the market price of the common stock and can necessitate an even greater issuance of common stock in subsequent conversions. This phenomenon can create a downward spiral in the market price of the common stock as greater numbers of shares are sold into the public market. Moreover, the issuance of large blocks of new common stock severely dilutes existing shareholders. The floating conversion feature also provides the unscrupulous with an incentive to depress the market price of the company's common stock. Even for legitimate investors, there is an incentive to try to lock in profit by selling the issuer's common stock short, covering with shares obtained in the conversion. Often, the cumulative effect of market manipulation, short-selling and the flood of common stock onto the market has been to put a company and its stock into the "death spiral."1 etc. ljx.com