Continued from page 1
A Convertible Debenture (CD) is a loan that can be converted into shares of public company. If lender loans public company a million dollars at Prime plus 3, they will make a profit. A CD loan allows lender to convert loan into shares of company. If CD allows loan to be converted at $4/share and company's share price goes to $10, lender makes more money on stock sale than from conventional loan. Convertible Debentures are popular in Canada because stock issued is free trading. They haven't been popular in States, because lender gets restricted (144) stock.
Toxic Convertibles are Convertible Debentures with an unspecified exercise price for shares. The lender can convert stock at current trading price of shares. This allows lender to sell short stock against CD while recovering loan and interest. The short sale of stock depresses company's share price. The lower share price allows lender to sell short more stock. It's a downward cycle for public company's stock. The CD is used as insurance against an upward surge in company's share price. The Toxic Convertible lender can't lose.
If a public company does a toxic convertible, by time they repay loan, their stock is trading for pennies a share. The public company fails and lender makes a multiple of principal of their loan.
The moral of this story is that public companies should be wary of Vulture Capitalists. Read and understand every word of every Agreement, before you sign it.
To contact author: Visit Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit Global Village Investment Club Website: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]