I am amazed that no one has posted the convertible note terms that any of the meme stocks have like AMC, Gamestop and many others.
As a former CEO of public companies that got caught in the convertible note toxic death sprial and trap, I know how “Hedge Funds” justify their stock borrows to the DTCC using convertible notes that have discounted conversion rates.
Let's say that the stock is trading at 1 dollar but the CEO needs money for the company to survive. As the CEO, my only option for financing, unfortunately, is through sleazy hedge funds and they offer fast money if I sign a convertible note to put out the immediate cash flow fires. The CEO will try and negotiate a fixed conversion price with a discount and floor but is vulnerable due to needing funds desperately to fund the company.
The CEO will negotiate with the Hedge Fund but no matter what the floor, they will doom the company once you enter one of these in most cases. For example, the note could say that it allows the Hedge Fund (Lender) to convert at a 30% discount to market with a .50 floor (or whatever they negotiate and many times they are FLOORLESS). This allows the Hedge Funds to cover their asses with the DTCC since they can justify getting more shares from these toxic notes so even though they look naked to the public the hedge fund can use the note to borrow shares that don't exist as long as the price goes down. The Hedge funds love longs coming in since it makes them more money before the death spiral happens and have no intentions of being paid back and want the company to come back for more money and just keep ratcheting down the floor until it goes to zero. It is a trap that many CEOs fall victim to in desperation for funding, especially nieve ones that don't understand how it works until it's too late and thinks that they can just pay back the note and the problem goes away, however, I have never seen a company survive signing a toxic note. I don't want to see everyone lose money and I personally don't think in my experience that any of these companies can survive without paying off any convertible notes they have in full (and sometimes that doesn't even get rid of them once they have infected the company)
The point being, I think someone needs to find out what the conversion terms are on any convertible debt financing these companies have raised. This will tell who the Hedge funds are that are naked shorting and what the floors are in the contracts that they can short it down to without repercussions with the SEC/DTCC. The hedge funds WANT LONG BUYING, they make money shorting against it and have the deck loaded 100% in their favor… The only way out of it is for a whale to come in and buy out 100% of the debt and get the hedge funds out of the picture. They are basically LOAN SHARKS.
Found this online about AMC for example and I bet with someone researching their 8k disclosures that you will find they have convertible debt with discounted rates and a very low floor:
Those 2018 issuances are part of the company's $1.8 billion in convertible commitments coming due in 2024, but 2026 will be the reckoning for AMC's troubled pandemic borrowing. The company will see over $6 billion in non-convertible debt and $1.20 billion in convertible debt coming due in that year.
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