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[cintrix]

The debt holder shorts when it is a death spiral convertible. They know that once the conversions happen the stock drops dramatically - so they short them. Here is an explanation:

Death spiral convertible bonds differ from normal convertible bonds in the sense that instead of having a predetermined, fixed conversion ratio, death spirals have a floating conversion ratio in which the holder receives a discount for converting shares. For example, a death spiral bond with a face value of $1,000 has a convertible value of $1,500, which means that a bondholder will receive $1,500 dollars worth of equity for giving up a $1,000 bond.

The problem with this class of convertible security is that these bonds promote large drops in share price. This is because once a bondholder converts the bond into shares, the influx of these new shares dilutes the share price. Furthermore, bondholders have a large incentive to short sell the common stock prior to conversion, knowing that the share price will fall after the conversion is made. The short sale causes another drop in share price, giving this security its 'death spiral' name.

Interestingly enough, death spiral convertibles were a common form of financing for companies that were badly in need of cash and had little means of raising it. These companies felt that the prospect of borrowing money without paying it back outweighed the losses incurred by decreased share values.
http://www.investopedia.com/ask/answers/06/deathspiralbond.asp