gembree

NovaStar's Death Spiral Financing Deal With Mass Mutual

Yeah, the full 8-K is now out and it is adjustable based on dilution, but not based on market price. My error, I didn't hear the call.

NovaStar's Death Spiral Financing Deal With Mass Mutual

Straight from the 8-K:

"The Series D-1 Preferred securities are initially convertible into 7.5 million shares of common stock of NovaStar based upon the initial conversion price of $7.00 per common share. The Series D-1 Preferred securities are convertible into common stock at any time at the option of the holders, based on a conversion ratio which is subject to certain adjustments. The Series D-1 Preferred also may be converted into common stock at NovaStar’s option, under specified circumstances. Dividends on the Series D-1 Preferred securities will be payable in cash."

It sounds like death spiral financing to me, largely because of the vagueness. If it's an adjustable ratio, it's hard to believe it's not adjustable downward. On the plus side, the D-2 available to shareholders is also convertible at the same ratio, but that just makes it a play-at-home version; the negative incentives remain intact. I don't think there's malicious intent so much as a desire to preserve their investment at the expense of the common should things go sour.

I don't think Herb pointed out that the dividend will be a preferred convertible stock dividend, terms TBA, payable to common and preferred holders; the only cash dividends available going forward accrue to the Series D-1, which is only available to MassMutual and Jefferies.