I'm not the toxic financing expert by any means ....
.... the original purpose of this board was simply to show what generally happens to the share prices of companies who obtain this type of financing.
Whether what happens to them happens because they must be 'troubled' to need this kind of financing to begin with , or because the 'toxic' financing makes them 'more troubled' , or both , is immaterial IMHO because the warning is clear: if a company obtains this kind of financing , 90%+ of the time they are probably not a good long term investment , based purely on the data shown in the iBox.
That having been said , let me take a stab at answering your first question:
Let's say financier abc loans $10,000,000 to company xyz.
In return abc gets some sort of convertible debenture which allows abc at some point in time to buy shares from the company at a discount (shares which the company will print/issue upon demand , and which will add to the outstanding share count).
This discount can be anywhere between 3% and 50%+ off an average of a 10- or 20-day VWAP or off the lowest closing bid price over the last 30 days , whatever abc wrote in the terms and xyz accepted ... simply , a discount off a future current price.
abc also gets some pretty good fees up front , often 10% and more of the principal amount taken right back by abc as structuring fees , due diligence fees , monitoring fees , etc. , but the principal remains the same , the original amount.
abc also gets interest on the principal amount , 8% to 15% per year and higher , often with default terms which can escalate that higher.
Now , if the company's PPS goes up , everybody wins , and abc converts/buys shares at a discount to market and sells them at a profit , on top of the interest and on top of the up-front fees.
If the company's PPS goes down , abc wins , they still can convert/buy shares at a discount to market and sell them at a profit , on top of ... etc. Just the xyz shareholders lose.
Now if abc is in a bit more of a hurry , I suppose abc could short the stock somehow , directly if it's allowed in the terms of the agreement (it often IS allowed) or indirectly perhaps , I dunno , and maybe they never ever do ....
So they could short , oh , pick a number , $10MM worth of shares at an average of $1.00 per share just for example , a nice round number. That's 10MM shares shorted, and $10MM in abc's bank.
The troubled company's share price starts tanking , people get worried about the toxic financing , all the reasons xyz had to get this sort of financing (no profit? no revenues? no product? high salaries/perks/consulting agreements for friends?) are still there and they kick in with a vengeance and the PPS just goes down. Lots of times during the course of this scenario the company needs more money and takes more loans and there's more dilution and more worries and more debt and it just gets worse and worse.
abc can be converting/selling shares all the way down I suppose , recouping portions of the investment , maybe even recouping the entire $10MM , which would give them a profit right there of the $1MM structuring/monitoring/DD fees they kept out of the $10MM , and depending on how long they were charging interest maybe they got another $1MM , for a 20% return?
And at some point abc has to replace those 10MM shares they shorted and at a PPS of .10 per share that will only cost them $1MM out of the $10MM they banked on the initial short , so they have another $9MM left in the bank on the deal.
So , is that maybe $11MM in profits over and above a $10MM 'loan'?
Or , maybe since they kept the $1MM in fees to begin with , it's just $10MM of profits over and above a $9MM loan?
I'm sure there are details / certain restrictions / etc which make some or all of the above not a workable scenario , like I said ... just a stab at it.
jonesie
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