IFAN Financial Inc (IFAN)

[GoAndCollect]

This is what's happening
Many small companies rely on selling convertible debt to large private investors (see private investment in public equity) to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario, the holder of the convertible debt initially shorts the issuer’s common stock, which often causes the stock price to decline, at which time the debt holder converts some of the convertible debt to common shares with which he then covers the debt holder's short position. The debt holder continues to sell short and cover with converted stock, which, along with selling by other shareholders alarmed by the falling price, continually weakens the share price, making the shares unattractive to new investors and possibly severely limiting the company’s ability to obtain new financing if necessary.

An important characteristic of this kind of convertible debt is that it often carries conditions like a quarterly or semiannual reset of the conversion price to keep the conversion price more or less close to the actual stock price. However, a lower conversion price also increases the number of shares that a bond holder gets in exchange for one bond, which increases the dilution of existing shareholders. A lower price reset can also force investors that have set up a long CB/short stock position to sell more stock ("adjust the delta"), creating a vicious circle, hence the nickname death spiral.

STAY AWAY FROM THIS : SEE THE NOTES THIS IS FATAL