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Death Spiral Convertible

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Death Spiral Convertible
Used by companies that are in such bad shape, that there is no other way to get financing. This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as toxic convertibles or floorless convertibles.

Death Spiral Convertible
A loan that investors give to a publicly-traded company in exchange for convertible bonds. The convertible bonds give the investor a right to buy shares in the company at a (usually low) agreed-upon price. However, issuing these shares creates more shares outstanding, which results in a drop in the share price. The low share price encourages more bondholders to convert their bonds to equity, which causes a further drop in price and the process ? known as a death spiral ? continues. Because of this disadvantage, companies only issue death spiral convertibles if they badly need cash.


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