Floorless Convertible

Floorless 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 death spiral convertibles.

Death Spiral

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 low, agreed-upon price. However, issuing these bonds creates more shares outstanding when they are converted, 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 continues. Because of this disadvantage, companies only engage in death spirals if they badly need cash.
References in periodicals archive ?
2003) (although it was up to the company's directors to decide how to proceed in their search for financing, lawyers who were advising them had a duty to explain the dangers of "floorless convertible securities," given their exotic nature and the grave risks associated with them).
(1) Other common, and mostly negative, ways of describing these securities include "floorless convertibles," "structured PIPEs (private investment in public equities)," "discounted convertibles," "lesser-of-convertibles," "junk equity," corporate loan-sharking," "payday advances," and "pawnshops for dot coms." See Friese and Raisi (1999).