RE:RE:RE:RE:RE:RE:RE:RE:Debentures or commons....I agree with John on the first question. The debentures that won't trade are seperate from the $36.5m in debentures that will trade. I'm sure MM will value that at par so I don't see why you can't.
On the second question, the borrow on FIRE shares is very high based on a number of factors so if one wants to hedge the converts they have to pay significant amount of interest per share to do so.
Assuming the marginal buyer of the converts plans to hedge, they need to pay the borrow cost on all of shares that the debentures convert into. When the borrow cost is high it really adds up. For a penny stock like FIRE, the borrow cost is often determined on the basis of US$1/share regardless of where its trading. So if the borrow cost is 25% at US$1.00, it costs about 5 cents a share to hedge for 2 months (blending the 4 month hold paper).
To flesh it out some more and keep the numbers simple, if I want to buy $100k in converts it will cost about $31k. The amount of shares to short to be fully hedged is around 244k shares. So assuming those can be short at 19 cents, that would raise about $46k but I have to pay 5 cents a share in borrow costs, so it nets out to proceeds of $34k. That's still $3k in profit over ~2 months (using blended to make it easier) so a very high return on a risk free basis but also not worth doing for at least that much profit because its not really risk free as the borrow cost can go up or be called or the transaction could be delayed which is really expensive given the borrow cost.
That's why its so powerful for retail investors to buy the converts. With the example numbers used above, once the converts are at 35, the entire arb is gone so the hedge funds will buy stock to cover as they sell their bonds which might change the momentum in the shares.
Is that helpful?
WealthBuilder99 wrote: Hi Method & John,
One thing I wanted to point out regarding the debt. Re-read the news release and you'll notice the new series of debentures "will not be listed" therefore they will show no value, not that that matters if you plan to hold until conversion, which I do.
I wanted to ask you two, regarding your comment, "the arb exists because of the short borrow" can you elaborate? I'm stil unclear around this.
Thanks.