Manhattan Bridge: Radical Share Issuance

| About: Manhattan Bridge (LOAN)

Manhattan Bridge Capital's (NASDAQ:LOAN) stock trades at a large discount to its net assets. But while the company has just 3.3 million shares outstanding, this week shareholders will vote to give its CEO, Assaf Ran, one million shares. Because Ran owns half of the company's shares already, this looks like outright robbery of minority shareholders. But the situation is not as bad as it looks. In return for the one million shares, Ran effectively turns in 490,000 options he holds that he has accumulated over the years. For shareholders, it's much better that managers own shares as opposed to options. This is because managers are then cognizant of downside risks, which they do not have to be with options.

In this case, these one million shares vest in 15 years, with Ran forfeiting the shares if he does not continue to work for the company over this period. This definitely encourages him to think like a long-term shareholder.

The board also hinted that the larger number of shares owned by Ran may encourage him to personally guarantee some of the company's debts. Because Manhattan Bridge's profits are very sensitive to the rate it receives on its loans, more favorable loan terms the company may be granted as a result of a personal guarantee would likely improve profits.

While the deal looks bad on the surface, there are some good parts to it. But the deal isn't perfect for shareholders, as Ran is certainly getting a big payday; he's getting twice as many shares as he has to return in options, and there's no indication the company won't continue to dole out options in the future. The results of the vote should be out by the end of the week.

Disclosure: I have a long position in shares of LOAN