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Death Spiral Convertible Just Refuses to Die
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So far, two hedge funds are leading the way in investing in death spiral deals. Over the past 12 months, Cornell Capital Partners has emerged as the top investor in death spiral transactions, sinking $175 million into 42 deals. In second place is NIR Group, which has invested $77 million in 40 transactions.
No other hedge fund comes close to Cornell Capital or NIR, says Robert Kyle, executive vice president of Sagient Research, the parent company of PlacementTracker.
Mark Angelo, the founder and president of Cornell Capital, a $500 million fund located in Jersey City, N.J., declined to comment. Corey Ribotsky, the manager of Roslyn, N.Y.-based NIR Group, did not return several phone calls. NIR Group has $486 million in assets under management.
PIPE deals, of course, come in all shapes and fashion. But almost every deal involves the sale of discounted shares to a group of hedge funds.
Death spiral PIPEs got their unsavory reputation because, unlike typical convertible bonds, which get converted into shares only when a stock rises to a fixed price, the conversion price for these notes keeps getting adjusted downward whenever the underlying stock falls. The drop in the stock price also means the buyers are entitled to receive more shares when the conversion occurs.
The floating convertible feature is intended to be an embedded hedge to protect investors in the event the stock doesn't rise in price after the deal. But, in the past, some unscrupulous hedge funds that bought the bonds saw the floating conversion feature as an invitation to make money by literally shorting the stocks to death. In many cases, those hedge funds violated contract provisions forbidding any shorting of the company's stock. (Nobody has lodged such allegations about Cornell or NIR.)
A short sale is a market bet that a stock will fall in price.
Posts: 3255 | From: Los Angeles California | Registered: Jan 2006
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Death Spiral Convertible Just Refuses to Die Page 3
To some degree, every PIPE deal, not just death spirals, is a bit of a Faustian bargain for a company. In selling discounted stock or a bond that converts into discounted shares, the company hopes all the extra shares coming into the market won't depress the price of its stock.
PlacementTracker reports that six months after a death spiral convertible is placed, the stock of the issuing company is down, on average, 7%. Yet, ironically, death spirals are not the worst-performing PIPE deals.
PlacementTracker says companies that sell bonds with a so-called "convertible reset'' conversion provision often see their shares plunge by 26% six months after doing a deal. A convertible reset PIPE is a modified death spiral that doesn't have an endless conversion feature.
Indeed, the NIR Group, which mainly invests in death spiral PIPEs, reports having some stellar annual returns. The NIR Group's AJW Offhore hedge fund is up 6% this year, after rising 17% last year, according to a report sent to the hedge fund's investors.
One hedge fund manager who didn't want to be identified says most investors in death spiral deals want a company's stock to go up. He says the floating convertible is intended to provide protection to investors. He says there's more money to be made from a company's stock rising than falling.
The hedge fund manager says death spirals unfairly got a bad reputation because of abusive short-selling by some rogue hedge funds.
Casper Hallas, a portfolio manager with Denmark's Scandium Asset Management, agrees with that sentiment. He says his fund invested with the NIR Group because he likes PIPE deals with a floating-conversion feature. He says the downward-conversion feature provides added protection for investors.
"If the market goes down, you convert at the lower rate,'' says Hallas. "Having a floating rate is a little bit like riding a put.''
Posts: 3255 | From: Los Angeles California | Registered: Jan 2006
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The "death spiral convertible" might sound like your last car, but it's a bond -- and it's making an unlikely comeback on Wall Street.
These much-maligned securities, whose conversion into common shares can be triggered by precipitous drops in a company's stock, all but disappeared from the market three years ago. The near extinction occurred as investors got wise to the deleterious impact an endless flood of new shares can have on price.
Subsequent allegations of manipulative trading by some of the hedge funds that invested in these deals looked to be the death knell of the death spiral convertible. Those allegations ultimately spawned a regulatory investigation that led to a number of enforcement actions against hedge funds accused of illegally profiting from declines in stock.
Over the past year, however, there's been a surprising revival in the market for death spiral convertibles -- known officially on Wall Street as "floating convertibles.''
In particular, small, cash-strapped companies with market capitalizations often under $100 million are selling these bonds to hedge funds in deals covered by the Wall Street acronym PIPEs, or private investments in public equity. The resurgence in death spiral deals may be an indication that tiny, cash-strapped companies are finding fewer options for raising money.
This year, 10% of the 478 completed PIPE deals brought to market have been death spiral transactions. By comparison, just 1.9% of all PIPE deals in 2003 were categorized as death spirals, according to research firm PlacementTracker. (PlacementTracker officially calls them floating convertibles).
Last year, death spirals accounted for 6.4% of the $20 billion-a-year PIPEs market. Death spiral deals peaked in 1999, when they represented 20% of all PIPE transactions.
Some of the companies that have done death spiral PIPE deals with floating conversion prices this past year include Generex (GNBT:Nasdaq) and Vasomedical (VASO:Nasdaq) , according to PlacementTracker.
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The Securities Industry and Financial Markets Association (SIFMA) has announced the industry-wide adoption of the Automated Recall Messaging System (ARMS), effective in February 2007 (see attached SIFMA Important Information). DTC supports the goal of automating the stock loan recall process either through a vendor-developed ARMS platform or through a direct connection to DTC’S SMART/Track for Stock Loan Recalls.
DTC’s SMART/Track for Stock Loan Recalls (formerly known as the Universal Hub for Stock Loan Recalls) was implemented in 2003, as described in DTC Important Notice B#4758, dated May 6, 2003.SMART/Track provides a central point of access for the automated transmission of stock loan recalls. Participants using a vendor-developed ARMS platform connect to SMART/Track through their vendor while participants that have their own automated stock loan recall capability connect directly to SMART/Track to send stock loan recall messages to their counterparties. By providing a single point of access to all parties, SMART/Track ensures that neither ARMS vendors nor individual participants have to build bilateral links to other vendors or participants for the transmission of stock loan recalls or keep track of the relationship between their counterparty to the recall and a vendor, if any.
Stock loan recalls can be sent to SMART/Track via MQSeries or DTC’s standard file transfer capabilities –Connect:Direct (formerly Network Data Mover or NDM) and File Transfer Protocol. SMART/Track creates an acknowledgment/receipt record for each message processed to notify the sender that it has received the message and that it has forwarded the recall message to the receiver. SMART/Track also creates a receipt record for the sender when the counterparty has retrieved the stock loan recall message.Each stock loan recall message is assigned an internal control number for audit trail purposes. If SMART/Track cannot deliver the stock loan recall message, it will reject the message back to the sender forresolution. SMART/Track only validates the header of the recall message to ensure that it can successfully deliver it and does not edit the recall data contained in the message.
Registering for SMART/Track for Stock Loan Recalls
Participants planning to use an ARMS vendor, currently SunGard/Loanet or EquiLend, to send stock loan recall messages, need to complete a third-party authorization letter on their firm’s letterhead designating the vendor (see attached). The third-party authorization letter should be sent to DTCC’s Participant Interface Planning group.
Participants that plan to connect directly to SMART/Track for Stock Loan Recalls need to establish connectivity to DTCC. SMART/Track is available for testing once participants have established connectivity. To establish connectivity, please contact Cliff Testa, Participant Interface Planning, at ctesta*dtcc.com.
If you have any questions regarding SMART/Track for Stock Loan Recalls, please e- mail the undersigned at mkoontz*dtcc.com or aramkalawon*dtcc.com.
Margaret Koontz Director, Product Marketing and Development
Ashik Ramkalawon Product Manager, Product Marketing and Development
Posts: 81 | From: venice, fl | Registered: Aug 2006
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posted
Do we assume that Mike knew what he was doing when he signed on with this toxic financing? I seem to remember that maybe Sabra brought the financing to Mike.
On another note, this statement in the PR is bothering me: "...lessen any further dilution of the company stock." How much dilution are we talking and when did this happen???
Posts: 1028 | From: Georgia | Registered: Jul 2005
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Dilution... Well according to Mike A. posts on HSM, he went from have 14 million restricted to 50 million common. So right there is an extra 36 million. Who knows what else...
quote:Originally posted by milliam: Do we assume that Mike knew what he was doing when he signed on with this toxic financing? I seem to remember that maybe Sabra brought the financing to Mike.
On another note, this statement in the PR is bothering me: "...lessen any further dilution of the company stock." How much dilution are we talking and when did this happen???
posted
Not a big fan of Lee Webb but his is interesting.
By Sept. 30, 2005, just over a year after Mr. Alexander took control, the company had an accumulated deficit of approximately $2.7-million, a working capital shortfall of approximately $256,000 and chump change of only $9,227 in cash.
In November of 2005, the haemorrhaging company hooked up with a coterie of financing outfits at least nominally led by Corey Ribotsky for a badly needed cash infusion.
Mr. Ribotsky is the frontman for AJW Partners LLC, AJW Qualified Partners LLC, AJW Offshore Ltd. and New Millennium Partners II LLC, which are quite active in providing toxic financing to OTC-BB companies.
On Nov. 18, 2005, Mr. Alexander signed convertible debenture purchase agreements for an aggregate $2.5-million with Mr. Ribotsky's companies.
Under the terms of the agreements, the toxic financiers advanced $1-million on Nov. 18, 2005, and another $750,000 on Dec. 23, 2005. The remaining $750,000 was to be paid upon the acceptance of a registration statement covering approximately 50.4 million Furia shares, but that never happened.
The convertible debentures were floorless, constituting what is commonly known as a death spiral financing. The onerous nature of the financing was acknowledged in a subsequent filing.
"Our obligation to issue shares upon conversion of our secured convertible notes is essentially limitless," Furia reported in an SEC filing.
As it turned out, even before receiving the second tranche of the financing, Mr. Alexander triggered a default provision in the convertible debenture agreement that made the $1.75-million and a penalty of $528,288 immediately payable.
Perhaps not noticed, or simply ignored, by Mr. Alexander, a provision of the convertible debenture agreement prohibited the company from redeeming, repurchasing or otherwise acquiring any of its own shares without the written consent of the noteholders.
Notwithstanding that provision and without bothering to make any public announcement about what he was up to, Mr. Alexander opened a brokerage account for the company and, using money from the financing, purchased more than 1.9 million shares at a cost of $376,000.
It is not clear who benefited from the default-triggering largesse of the financially challenged company, but it is fairly clear when the "open market" purchases occurred.
Through the early part of December of 2005, Furia's stock price was languishing at approximately six cents per share in light trading.
On Dec. 8, the stock closed at 6.4 cents with only 23,000 shares changing hands.
On Dec. 9, the stock rocketed from six cents to close at 20 cents on a volume of approximately 1.5 million shares and another 562,000 shares changed hands in the following trading session as the stock again closed at 20 cents per share.
Given that the company paid approximately 19.2 cents per share for the more than 1.9 million shares it purchased in December of 2005, it is fairly clear that the buying that triggered the default probably occurred during those two trading sessions.
Evidently it took some time for Mr. Alexander to twig to the fact that the company's unannounced pre-Christmas share buying spree had triggered a default provision of the toxic financing.
On Dec. 20, 2005, the company took its first stab at filing the registration statement for approximately 50.4 million shares as called for by the financing agreement and then followed up with an amended registration statement on Jan. 18, 2006.
By Feb. 15 when the company filed its quarterly report for the period ending Dec. 31, 2005, however, the default was acknowledged.
On March 28, Mr. Alexander got around to withdrawing the registration statement.
"The company intends on redeeming the convertible notes, issued to the selling shareholders and therefore, there is no need to register the shares underlying the convertible notes," Mr. Alexander reported in the withdrawal application.
"The company further advises the commission that no shares of common stock sought to be registered pursuant to the Registration Statement have been sold or offered," he added.
Just how the company planned to redeem those notes, or what ever became of that plan, is anyone's guess, but the defaulted notes were still outstanding at the end of March.
When FrontHaul filed its dismal financial results for the period ending March 31, 2006, the company had an accumulated deficit of approximately $6.9-million, which was racked up in less than two years, a negative net worth of $1.8-million, a working capital shortfall of more than $2.3-million and a paltry $57,000 in cash.
Notwithstanding its dire financial condition, the company saw fit to further breach the provisions of the toxic financing during the quarter by purchasing another 818,405 of its own shares at a cost of approximately $244,000.
No further financial information regarding FrontHaul has been filed since the company issued its third-quarter report for the period ending March 31, 2006.
Interestingly, the financing agreement with Mr. Ribotsky's companies called for Mr. Alexander to pledge more than 25 million of his shares and deliver them to the toxic financiers along with an executed transfer form.
Given that Mr. Alexander changed Furia's name to FrontHaul on April 13 by virtue of his control of more than 75.1 million shares representing more than 78 per cent of the company's stock, including 50 million shares that he had the right to acquire from the conversion of 500,000 preferred shares, he evidently still had control of the 25 million shares pledged to the toxic financiers at that time.
In any event, on July 8, cash-strapped FrontHaul entered into a share-swap merger agreement with Mr. Harris's penniless CVSU.
Under the merger agreement, FrontHaul, which oddly claimed to have approximately 62.2 million shares issued and outstanding, issued approximately 48.9 million shares to acquire Mr. Harris's company.
In spite of the fact that FrontHaul was the purchaser and its shareholders still controlled the majority of the stock, Mr. Alexander exited the company, giving way to Mr. Harris and his associates, who ratcheted up the promotion.
Interestingly, Mr. Harris and his new board of directors subsequently passed a resolution cancelling the 50 million shares that, according to SEC filings, had been reserved for issuance to Mr. Alexander.
Given recent developments, it is not clear whether the resolution cancelling Mr. Alexander's 50 million shares was ever put into effect.
posted
Stop it...you offer a lot to this board Mr. C…you have uncovered a lot and are always thinking…I like that. It is actually a good thing that we are not all in agreement here. Nobody really knows what is going on. I’m not even sure those directly involved know what is going on. One thing we do know is that somebody is lying big time. Our job is to find out who is the better liar.
How else are we supposed to figure out what is going on if we all believe the same thing? Isn't that how we got in this mess in the first place? We all drank the same Kool-Aide?!?! Now we are all very skeptical...and this is a good thing. Keep it coming…I want to hear every angle. Let’s just be civil to each other. Let’s offer information with the motivation to help each other get to the truth… not necessarily to prove the other person wrong.
Personally, I have moved on to beer…no more Kool-Aide for me.
quote:Originally posted by Mr. CATIAEngineer: Ok folks, take this for what its worth........
It appears that in the interview last night Rufus is pointing us in the direction that a lot of stock sites and posters have already been, the toxic financing issue Alexander involved himself with back in November of 2005. I believe FHAL starting getting "pumped" in December of 05 and i recall there was actually a little but of a run.
Anyway, Rufus named 3 other stocks last night and told people to dig into their background, message boards...etc.
The link that the three of these (and many others, CNES was another) have to FHAL are Cory Ribotsky / AJW offshore LTD....and his various other companies.
Im not up to the whole "finger pointing" thing these days because i feel like ive had it nearly bitten off a couple of times so im merely posting what ive found and i have no idea what relevance there is to any of it. My GUESS would be that Rufus wants us to dig deeper into the toxic financing Mike Alexander signed himself up for back in late 2005......but hey, wtf do i know right?
-------------------- "If you go the Extra Mile there will be no Traffic Jams".
St. Matthew Posts: 885 | From: Dallas, Texas | Registered: Sep 2006
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posted
Warning, the following is my theory on what might have happened:
Mike signed the toxic financing possibly not knowing what he got himself into. He alluded to this a bit at the BBQ when he said he couldn't believe his stock price was dropping when he was PRing good things for the company. He also said he was surprised when Rufus came to him and told him who Mike was dealing with. Mike didn't feel Rufus would know this information. So, I'm guessing Rufus came to Mike very early on...not long after the AJW deal. Rufus told Mike what was going on and how he wanted to get the bad guys. Mike went along with the plan...buying up shares and defaulting on the loan. He started setting the company up for a shell takeover. Mike then came up with the CEOTA deal and caused some buying of the stock. I'm guessing he did this to bring in the shorters. Finally, Rufus stepped in and brought all of his assets to the table. The shorters and the toxic financing guys were in way over their heads and pulled out all of the stops...***, ourstreet, etc.
What happened from there? Who knows. Did Mike flip and go to the dark side? Did Rufus bring real assets to the table or were they just made up like the CEOTA deal to try and get the shorters, toxic financiers. Did someone high up push the SEC to move too fast? Man this is going to be a great movie!!!
Posts: 1028 | From: Georgia | Registered: Jul 2005
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posted
Haha St Matt when i first started reading your post i was pretty confused. You started with "Stop it".....but now I follow what you meant LOL.
Anyway, i agree with your post. IMO we all still need to keep an open mind to what may or may not have happened to get us here today.
Milliam, im not sure if Mike knew what has was doing or not. Recently i posted that maybe things blew up in Mikes face forcing him to a desperate move which led to the merger.
When the CVSU/FHAL merger was announced i believe approx 30 days had passed since the LOI with CEOTA was announced. Ive heard rumor that a LOI is valid for 30 days after which its either canceled or becomes a definitive agreement. Can anyone comment on that?
Posts: 2308 | From: Michigan | Registered: Jun 2006
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posted
Nice comments St. Matt... I agree. I once thought everyone to be on the level. At least as far as I could throw them. Now I see positioning and posturing that reveals that several have been bought and sold in this deal.
It does raise alot of questions and my digging is for pure information purposes only. I can honestly say I changed my tune when the bonds got side tracked. No matter how "Real" my DD has shown them to be over the past several months, when everyone is saying "We are going to put this $7.2 Billion over here to the side and forget about it because the SEC says so." Well I have to face facts and say ok... Maybe there is something huge and horible that I did not find.
I invested in what was to be a Billion dollar company that has proven to be worth jack, but yet is still the focus of some pretty large controversy. This stock for me is not about the money or recovery of losses at this point. Fact is I am working that out on some other stocks. Now my focus is to watch and learn. As Rufus says, "take notes."
I have all my shares, but I don't expect them to be worth much anytime soon. I would just like to witness this drama to the end.
Being civil to each other is a no brainer. We'll all learn many lessons from this one if we haven't already.
Until then I am, "sitt'in on the shelf". HAHA!!
-------------------- Una Mas! Posts: 2717 | From: Eville,IN,USA | Registered: Feb 2004
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Tax- I have to say this & you are not going to believe it is coming from me but- even if the bonds are fake...or not all owned by Conversion that doesn't mean Rufus knew that....These bonds were brought to the table by Sabra......Rufus may have not known they were not real (if in fact they aren't)...
I wonder why Sabra is never brought up....It's weird.....Aren't they looking at her? She's the common denominator....
-------------------- ..just remember....Family is EVERYTHING!! Posts: 3944 | From: Rochester, NY | Registered: Sep 2006
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quote:Originally posted by Jenna: Tax- I have to say this & you are not going to believe it is coming from me but- even if the bonds are fake...or not all owned by Conversion that doesn't mean Rufus knew that....These bonds were brought to the table by Sabra......Rufus may have not known they were not real (if in fact they aren't)...
I wonder why Sabra is never brought up....It's weird.....Aren't they looking at her? She's the common denominator....
I agree... I also think Sabra has much more Washington in her than Georgia. May be the reason she has not been involved. Someone who can step in the next room and get Rudi G. on the phone has "Star Power" IMO.
I once posted a mansion on here once that she was interested in purchsing. Can't remember the link but the cost of that home was unreal. I would not be surprised if she has friends in places that are politically untouchable.
JMHO of course. I am definitely NOT saying that I know any of this for a fact. She could be Hugo Chavez's girl friend for all I know. GL Sabra!
-------------------- Una Mas! Posts: 2717 | From: Eville,IN,USA | Registered: Feb 2004
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quote:Originally posted by Jenna: Tax- I have to say this & you are not going to believe it is coming from me but- even if the bonds are fake...or not all owned by Conversion that doesn't mean Rufus knew that....These bonds were brought to the table by Sabra......Rufus may have not known they were not real (if in fact they aren't)...
I wonder why Sabra is never brought up....It's weird.....Aren't they looking at her? She's the common denominator....
I know I have brought up the subject of Sabra and remember a few others as well that feel she is smack dab in the middle of the whole thing.
But it is odd that we are hearing from many involved but not from Sabra or Ben. I mean Sabra had 9M shares last I looked. That's a pretty good stake in things.
GLTA Wally
Posts: 3255 | From: Los Angeles California | Registered: Jan 2006
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posted
If this Sabra is so well connected , why would she even think about tarnishing her self with this POS ??? I would think she'd be rubbing shoulders with the big boys not some hill billy con man .
-------------------- ----- Game Over ----- Posts: 1536 | From: San Antonio - Texas | Registered: Oct 2006
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posted
No doubt that Sabra is involved with all of this. From what I heard, she was the one that wanted to take over the first time Rufus was ousted. I believe she was the one who organized the ousting. Then there's Mitch...I think he was the insider that was throwing Rufus under the bus. Wonder what happended to him?
Posts: 1028 | From: Georgia | Registered: Jul 2005
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Just tried Alana for the 4th time today.....maybe she will call me back tomarrow.....sorry guys I have to go to an appointment.....see ya later....
-------------------- ..just remember....Family is EVERYTHING!! Posts: 3944 | From: Rochester, NY | Registered: Sep 2006
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quote:Originally posted by TaxBack04: How twisted would things be if Sabra was on the proxy?
Now dont go saying stuff like that!!!
Sabra supposedly setup the bonds AND brought Rufus to Mike so if any of the current theories are correct she would not be my first choice. I was surprised that Rufus said he had just spoken with her a few days ago though so who knows.
Posts: 2308 | From: Michigan | Registered: Jun 2006
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posted
By the way I found that link to the house Sabra was looking into... it was only $75 Million for the home. But the link is no longer available... below I attached the Google Cashed link.
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