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

To: TH who wrote (434)	6/4/1999 7:55:00 PM
From: RockyBalboa	Read Replies (1) \| Respond to of 1438

They are long - "by virtue". The convertible debenture is a hybrid instrument, a bond and a stock in one. There are even cases in which they got repaid in cash, rather than converted (in full), but that are rare cases. Example: Say the price per today is $2. They invest $1 Million which would mean slightly over 500k shares, depending on the discount. In the SEC filings you will find that they are allowed to engage in "hedging" transactions. So, they are allowed to sell stock which they don't have, for example. There are usually little restrictions on how many shares can be converted, but sometimes there are limits like: Not more than 1/12 each month etc. What happens then (I'm not a good trader but what gives). Say the investor shorts 100k shares (1/5 of the face amount) and he begins to sell he gets 1 7/8, 1 3/4, 1 5/8, 1 1/2 and then he leans against the price so that the bid is always at 1 7/16 for five days. What gives? He then uses the right to convert a small part (not all) of his debenture or preferred stock into common stock at, say 1 3/8 (= 1 7/16 less the discount). But he got an average of 1 11/16 in his short - in that example so his gain by closing the short position is: 22% (1 11/16 / 1 3/8). How much is converted? 100k shares x 1 3/8 gives $137,500 or only 27.5% of the face valueof the convertible (set aside accrued interest). So, 862.5k of the convertible is still outstanding and at the most recent conversion price (1 3/8) that means already 627K of new shares (862.5K / 1 3/8). So he can proceed with selling short, and converting. Sometimes, a stock goes up on news, when the selling pressure ends. But in general, stocks tend to drift. The next round of selling off shares could lead the stock from 1 3/8 to $1 and he can convert shares at 29/32, for example, again leaving over a part of the convertible. quote.yahoo.com this stock also has done some convertibles ... quote.yahoo.com (I traded this one when I saw a 500k block way submarket) ... Read: biz.yahoo.com and: biz.yahoo.com The only risk for the investor is that the common stock does not trade any more (gets delisted, files ch 11, ...). Then they have a hard time to bring in the cash by selling stock they put in the company before.

To: TH who wrote (434)	6/5/1999 9:26:00 AM
From: Mama Bear	Read Replies (1) \| Respond to of 1438

"The short profit is just not there" Thurston, there is just as much profit available shorting a stock at 1 1/2 as shorting it at 150. If I short 1000 shares at 150 and the company goes bankrupt I make $150,000. If I short 100,000 shares at 1 1/2 and the stock goes to 0 I make $150,000. The risk is higher with a stock that is at 1 1/2 because it is a lot easier to double or triple suddenly coming off a low base. But a convert holder with a look back clause doesn't have that risk. Barb