What Is Death Spiral Debt?

Death spiral debt describes debt financed through the use of a certain type of convertible bonds or 澳洲幸运5开奖号码历史查询:convertible preferred stock resulting in an ever-increasing number of shares of 澳洲幸运5开奖号码历史查询:common stock, inevitably leading to a steep🍸 drop in the price of th♎ose shares. Ultimately bankruptcy can result.

In general, convertible debt yields interest or dividends but also can be converted to common stock shares. Both types of debt are hybrid securities with attributes of both bonds and stocks.

Understanding Death Spiral Debt

A conventional convertible bond or preferred stock can be converted to a fixed number of shares. Death spiral de🔯bt, however, converts into a fixeꦓd value paid in shares.

As a stock's price increases substantially, investors in conventional convertible shares are likely to seize the opportunity to convert their bonds into fast-growing stocks.

However, a stock price decline motivates the owner of fixed value convertible bonds or shares. They ca🔯n get more shares of stock when they make the conversion. This process by definition increases the number of shares in the market, and that forces prices even lower.

The death spiral effect occurs as more and more fix෴ed-value convertible instrument owners convert their holdings into common stock as their value drops lower and lower.

Theoretically, the death spiral effect can continue until the sto💯ck is at or near zero value.

Why Create Death Spiral Debt?

This type of debt is som📖etimes issued by a company that desperately needs cash. A company that seeks death spiral financing probably 𓄧has no other way to raise money to survive.

It is important to note that death spirals typically allow buyers to convert the bonds or stock into common shares at a fixed value (not ratio). For example, a bond with a face value of $1,000 📖may have a conver🌄sion amount of $1,500. That means a bondholder will receive $1,500 worth of common shares by giving up a $1,000 bond.

However, conversion creates more shares, 🦄which dilutes the share price. This drop in price may cause more bondholders to convert because the lower share price means that they will receive more shares.

Enter the Short Sellers

Furthermore, traders short the stock in the expectation that the stock 🧸price will continue to dive.

Each additional 澳洲幸运5开奖号码历史查询:conversion will cause moไre pricౠe drops as the supply of shares increases, causing the process to repeat itself as the stock's price spirals downward.

The only hope for the company to interrupt the death spiral is to improve its operational results. If it can effectively invest the proceeds of the convertible bond issuﷺe in its underlying business, it may be able to thwart the short sellers and even stick them with the losses.