Avoiding a Convertible Bond Death Spiral

Avoiding or Potentially Saving Your Company from a Death Spiral by a Convertible Bond

Don't want to put the company on the roulette table? Already in a death spiral? Want to completely avoid such a situation with your corporate structure? Keep reading.

As a company looking to raise capital, you may be considering convertible bonds as a financing option, or you already are paying one back. While convertible bonds can offer some benefits, they also come with potential risks, such as the risk of a death spiral. A death spiral occurs when convertible bondholders aggressively sell the stock they receive from the conversion of their bonds, causing the stock price to plummet, and making it difficult for the company to raise additional capital.

Having Options:

Thankfully, there is an alternative option that can offer similar benefits without the potential risks of convertible bonds - stock loans. Stock loans are a financing option where a borrower puts up their stock as collateral in exchange for a loan. Here are some advantages of stock loans as an alternative to convertible bonds:

1. Finite Shares as Collateral: Stock loans are based on a finite amount of shares as collateral, which is why there is no way such a loan could ever go into a death spiral. Unlike convertible bonds, where the conversion of bonds can lead to an infinite supply of new shares flooding the market, stock loans only use a set number of shares as collateral. This means that the borrower knows exactly how many shares they are putting up as collateral and can be confident that there won't be any dilution or market flooding.
2. No Margin Calls: Another advantage of stock loans is that there are no margin calls. Unlike traditional margin loans, where the lender can force the borrower to sell their stock if the value of the stock drops below a certain threshold, stock loans are non-recourse loans, meaning that the lender's only recourse in the event of default is to take possession of the collateral. This can provide borrowers with greater financial stability and less risk.
3. Non-Recourse Loans: In addition to no margin calls, stock loans are non-recourse loans. This means that if the borrower knows they won't be able to pay back the loan, they can simply walk away. Since the loan is secured by the stock, the lender has no legal recourse to come after the borrower's other assets.
4. Flexible Repayment Terms: Stock loans often offer more flexible repayment terms than convertible bonds. With a stock loan, the borrower can typically choose the length of the loan term, as well as the repayment schedule.
5. Lower Interest Rates: Stock loans often offer lower interest rates than convertible bonds. This can result in significant cost savings for the borrower.
6. No Reporting Requirements: Convertible bonds come with reporting requirements, such as the need to file periodic reports with the Securities and Exchange Commission. With a stock loan, there are no reporting requirements, which can be a significant advantage for companies looking to keep their financial information private.
7. Quick Access to Cash: Stock loans can often be processed quickly, allowing companies to access the cash they need without the lengthy process of issuing bonds.

For companies in the midst of a death spiral, stock loans can be a potential solution.

By using their stock as collateral, companies can secure the funding they need without the potential risks associated with convertible bonds. Additionally, stock loans can provide a way for companies to raise capital quickly, which can be critical in times of financial distress.

Conclusion

In summary, while convertible bonds can be a useful financing option, they come with potential risks. Stock loans offer a similar set of benefits, without the potential drawbacks. If you are looking for a financing option that can help your company raise capital without the risk of a death spiral, a stock loan may be the right choice for you. With a set number of shares as collateral, no margin calls, and non-recourse terms, stock loans can provide borrowers with greater financial stability and flexibility.

At Stone Creek Global we are transparent throughout process. From our intial conversation to the money being released to your bank account, we are educating our clients so they fully understand not only the process but each set of the transaction. I can be contacted 24/7 on Linkedin or Mobile +1 (646) 979-9334, or my e-mail at [email protected]