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Replies to post #85370 on Amarin Corp Plc (AMRN)
"Hedge funds say being able to borrow shares easily to make the negative bets, called short sales, enables them to offset the risk of lending to struggling companies. But critics of the deals contend some bond buyers get involved only because the issuing companies facilitate their big negative wagers, and that their short selling can exacerbate problems for companies by driving down their share prices."
At the time ECD announced it would make shares available to bond buyers so they could hedge their positions, Scot Vorse, a retired investment banker and former ECD shareholder, contacted the U.S. Securities and Exchange Commission through its whistle-blower program to complain about the structure of that and other deals.
He never got a response.
The Journal reported that at least 24 companies have done bond deals since 2004 that involved the lending of stock, raising nearly $7 billion. Nineteen of the companies subsequently saw their share price fall by an average of 53 percent 200 trading days later.
Eight of the companies sought bankruptcy protection within five years, a rate of 33 percent, compared to a bankruptcy rate of 7.1 percent for about the nearly 800 U.S. companies that sold all types of convertible bonds since the beginning of 2004.
"It's just such a conflict of interest. It's a horrible story," former ECD shareholder George Voetsch told me this morning. "The big money for the hedge funds was on the downside. That's why they wanted management to take ECD into bankruptcy."
Energy Conversion, the solar-panel maker based in Rochester Hills, Mich., had notched losses for years but seemed to be turning a corner in 2008.
But the economic crisis made capital scarce, and competition was intensifying in the solar industry, so the company resorted to the $316 million Happy Meals offering. It lent 3.4 million shares—8% of its outstanding stock—to its underwriter, Credit Suisse, for distribution to bond investors. The offering documents warned that the "short positions established…could have the effect of causing the market price of our common stock to be lower."
Soon the company's prospects worsened. Chinese manufacturers undercut prices, and demand for solar panels slipped. Energy Conversion's stock, which had fallen to $60 from $72 in the two months following the deal, dropped to 20 cents by year-end 2011.
The hedge funds that bought bonds were positioned to profit. Wolverine Asset Management LLC, for example, bought $26 million of the bonds in 2008 and held most of them through 2011, securities filings show. That investment put the Chicago-based fund in a position to profit by nearly $9 million, a 34% return on its original bond investment, a Journal analysis shows. It would have lost about $14 million on the declining value of the bonds, yet earned nearly $23 million in bond interest and on short sales—if it shorted as much stock as it was entitled to under the deal and held that position until the end, the analysis shows. Wolverine declined to comment.
Hedge fund Diamondback Capital Management LLC bought Energy Conversion's bonds about six months after they were issued, after their value had decreased, securities filings show. Diamondback, now closed, acquired $37.7 million in bonds at reduced prices.
Diamondback's investment produced a $12 million profit, according to a person familiar with the matter. The profit came largely from interest on the bonds, from buying more of them when the value fell and selling them when it increased, and from betting against its stock.
