No cash, no credit? No problem!Usually the slogan of those usurious pay day loan companies, but it seems to apply to the likes of Wellington as well.
The more you examine their debenture “loan”, the worse it looks.
First they lend Samsys $6m for 24 months, but tell them to put $2m of it under a mattress for safekeeping. Oh, and you’ll pay 12% interest on that money too, if you don’t mind. In effect Samsys is lent $4m for 12% interest on $6m. Anyone here want to caculate the real effective interest rate on the $4m they actually get to use?
Oh wait, we also have the right to ask for a $2m prepayment of principal within 6 months. Here comes February – thank you very much. Anyone here want to calculate the real effective interest rate on what is now only a $2m loan for the first 6 months of holding that $2m (i.e. over that period they were paying 12% interest on $6m)?
Now you have $2m left. Not enough to carry you through the next quarter? Too bad, you still owe us so you can’t still touch that other $2m under the mattress. It was never really yours to begin with anyway. Remember we agreed on that. Keep those interest payments coming though.
Back to last August: Want another $1m? Sure but let’s make it convertible. It’s ok, we’ll fix it at current market (end of last August) at .86/share. That’s less than another 1.2m shares – not much dilution and we wouldn’t want to convert anyway unless the stock goes higher and you want to get the debt off the books with no drain on cash. Think of it as a mini-secondary offering. You also get an improvement to your balance sheet with a lower debt/equity ratio.
Oh and one more teeny-weeny little thing: just in case things don’t pan out as planned and we find you in default, we have the option to retie the convert to market on the basis of a 5-day average prior to the default. But hey, what are the chances of that? It’s a worst case scenario that’ll probably never happen. It’s just our little insurance policy. RFID is hot and you’ll be rolling in dough in no time. And really, how many shares could we possibly get? For all we know, the stock could be trading at twice where it’s trading today (last August), in which case we’ll just take the money. It’s not like the stock will tank over a little matter like us serving you notice of default or anything.
So all in all, a pretty good deal eh?
Now just sign here on the dotted line…