The most important thing to understand is that this is NOT toxic financing since none of the "rational investor" actions regarding the convertible bonds has a downward effect on the share price.
Case 1 debunked: Some have said that the convertible bond holders would short the stocks to lower the price and get more shares at a lower conversion price.
This case is nonsensical because it has tremendous risk and no return. The risk is that the shares climb upward on Kenyan news which gets the investor killed on the short position...and when those shares climb the conversion price goes up meaning that the investor gets fewer shares with which to cover his short position should it go against him. The reward is just as foolhardy. That is because if the shares go down, the investor makes some money on his shorts but if he then converts his bonds to shares he has essentially nulled out his short position, because he will be both long (with the bonds) and short with his short position. Reward = zero. Why would he do any of that when all he has to do is convert at anytime before maturity, get the shares at a 60% discount and sell them at the market price?
Case 2 debunked: Some have said that the convertible bond holders would convert their shares and sell the stocks and that's how it's toxic. The sale of all of those shares would tank the stock.
This case is nonsensical because it doesn't make any sense to convert the shares early on when you could make interest on the convertible bonds and convert the day before they mature and get the shares at the 60% discount and then sell them at market.
Hence, the idea that "immediate conversion" makes the shares toxic because of an immediate sale is also nonsensical and debunked.
Case 3 debunked: a whole lot of shares will be sold now. If the investors are waiting until the maturity date before converting and selling, per common sense above, then only those shares prior to maturity will be sold. The next maturity date is October 29...they convert and sell around then...about 3 million shares or so or $100,000. Big deal. The next one in November...also no big deal.
Case 4 debunked: "Immediate conversion" means there will be a lot of conversion occurring and that will hurt the share price with dilution. Well as mentioned above, there is no reason to sell the shares until just before the maturity date. However, there may be reason to convert if the plan is to hang onto the shares. Anyone who converts is tacitly implying that they will get a greater return by holding onto the converted shares over converting and getting that 60% discount. A 60% discount means you make 67% profit. So by converting and holding, they are saying they are willing to risk a 67% profit because they believe the company can return more by holding onto the shares.
Case 5 debunked: the shares are toxic because they appear toxic to outside short sellers who will all jump on the stock and short the stock.
Since the short sellers will be clearly wrong based on the above debunked cases, the short sellers will have made a mistake. That is their problem and not the problem of any longs. If short sellers erroneously sell short and drop the share price in the near term, as I believe they have...then bargain hunters should fear them not and take this opportunity to buy those shares. The shorts will get burned...when they experience a short squeeze.
THEREFORE the only acceptable conclusion is that the convertible bonds are NOT toxic.
Krombacher
