By the way, as a side note that has nothing to do with arbitrage, one must also consider that with a convertible note (so long as it is not converted yet), the company must pay interest.
If the company has not yet derived oil revenues, where does it get the money to pay the interest? It gets its money, most likely from the debt itself.
Hence the interest to be paid must be added to the principal of the loan. This is in essence very similar to a negatively amortizing loan since the principal balance increases by the interest to be paid. The compounding interest of this structure could render it toxic.
In other words, ERHE better find oil or it may have to default on the note. Such a default *could* lead to bankruptcy.
Krombacher - all in my opinion.
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