BofA Invests in CFC

[capeman]

Good luck to them on passing CDS paper. People aren’t touching corporate paper with a long pole at this point. They received a Preferred stock point of conversion at $18. The price can be altered by BofA to get more shares if liquidation occurs. So say they get 111 million shares or ~14% of the company at $18 but if the stock goes to $9 they get double the shares in conversion. If the stock goes to near Zero they screw the common stock holders and take what they’ve wanted all along which is the servicing unit. You can’t tell me that getting in at $18 when the stock was $21 then seeing it pop to $26 on volume of over 140million shares the next day that they weren’t shorting CFC into the hole on that. To top it they get a higher rate dividend than the borrowing rate so they are pretty much light of risk and the first vulture to the body in a liquidation event.

[davelj]

capeman, BAC is contractually bound NOT to short CFC’s stock over the 18 months following the deal. In addition, the 8-K filing doesn’t mention that this is a “floorless convertible,” as you’re suggesting. It merely mentions that the conversion price could be adjusted under “certain circumstances,” which we’ll find out about soon enough. (Might have “floorless” characteristics, might not – we don’t know yet.)

So, if you believe that BAC was “shorting CFC into the hole,” as you stated above, I believe you’re mistaken. And if you’re mistaken about BAC’s ability to short CFC’s stock (which is public information), you very well may have other aspects of this deal wrong as well.

If I’m wrong, please enlighten me.

[davelj]

capeman, BAC is contractually bound NOT to short CFC’s stock over the 18 months following the deal. In addition, the 8-K filing doesn’t mention that this is a “floorless convertible,” as you’re suggesting. It merely mentions that the conversion price could be adjusted under “certain circumstances,” which we’ll find out about soon enough. (Might have “floorless” characteristics, might not – we don’t know yet.)

So, if you believe that BAC was “shorting CFC into the hole,” as you stated above, I believe you’re mistaken. And if you’re mistaken about BAC’s ability to short CFC’s stock (which is public information), you very well may have other aspects of this deal wrong as well.

If I’m wrong, please enlighten me.

[davelj]

capeman, BAC is contractually bound NOT to short CFC’s stock over the 18 months following the deal. In addition, the 8-K filing doesn’t mention that this is a “floorless convertible,” as you’re suggesting. It merely mentions that the conversion price could be adjusted under “certain circumstances,” which we’ll find out about soon enough. (Might have “floorless” characteristics, might not – we don’t know yet.)

So, if you believe that BAC was “shorting CFC into the hole,” as you stated above, I believe you’re mistaken. And if you’re mistaken about BAC’s ability to short CFC’s stock (which is public information), you very well may have other aspects of this deal wrong as well.

If I’m wrong, please enlighten me.

[capeman]

With respect to dividends and distributions upon the liquidation, winding-up or dissolution of the Company, the Convertible Preferred Securities rank in priority senior to the Company's common stock and to each other class of capital stock or series of preferred stock (where the terms of the stock do not expressly provide that it ranks senior to or on parity with the preferred stock) and on parity with any additional Convertible Preferred Securities and any other class of capital stock or series of preferred stock. Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events.

This is directly from the 8-K and I'm wondering what could be construed as a CERTAIN EVENT. Perhaps the stock going below $18 a share and nowhere in the filing does it state that BAC can't short the company to nil in addition to making this investment. I can tell you from experience working in companies with heavily issued preffered stock that it gets the preferred their money back at the expense of the common shareholder even in liquidation. I'm sure BAC knew there would be a pop on the stock due to people thinking the pressure was off of the company. Good time to get some of your money back shorting with 140million share trading volume at levels up to 50% or greater price than the preferred issuance. This is referred to as the common practice of "Death Spiral Financing".

http://en.wikipedia.org/wiki/Death_spiral_financing

Although the best of faith in companies and people would lead one to believe that this is not practiced, this is business and banking and they are only in the business to make money at all possible costs. I don't think they are going to cover their shorts and take the profit. They will take the Loan Servicing group during the firesale.

I’m not saying you’re wrong as I can’t be 100% sure obviously but I have put money on this theory so if I am wrong I will pay dearly for it. Only time and money will tell.

[capeman]

With respect to dividends and distributions upon the liquidation, winding-up or dissolution of the Company, the Convertible Preferred Securities rank in priority senior to the Company's common stock and to each other class of capital stock or series of preferred stock (where the terms of the stock do not expressly provide that it ranks senior to or on parity with the preferred stock) and on parity with any additional Convertible Preferred Securities and any other class of capital stock or series of preferred stock. Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events.

This is directly from the 8-K and I'm wondering what could be construed as a CERTAIN EVENT. Perhaps the stock going below $18 a share and nowhere in the filing does it state that BAC can't short the company to nil in addition to making this investment. I can tell you from experience working in companies with heavily issued preffered stock that it gets the preferred their money back at the expense of the common shareholder even in liquidation. I'm sure BAC knew there would be a pop on the stock due to people thinking the pressure was off of the company. Good time to get some of your money back shorting with 140million share trading volume at levels up to 50% or greater price than the preferred issuance. This is referred to as the common practice of "Death Spiral Financing".

http://en.wikipedia.org/wiki/Death_spiral_financing

Although the best of faith in companies and people would lead one to believe that this is not practiced, this is business and banking and they are only in the business to make money at all possible costs. I don't think they are going to cover their shorts and take the profit. They will take the Loan Servicing group during the firesale.

I’m not saying you’re wrong as I can’t be 100% sure obviously but I have put money on this theory so if I am wrong I will pay dearly for it. Only time and money will tell.

[capeman]

With respect to dividends and distributions upon the liquidation, winding-up or dissolution of the Company, the Convertible Preferred Securities rank in priority senior to the Company's common stock and to each other class of capital stock or series of preferred stock (where the terms of the stock do not expressly provide that it ranks senior to or on parity with the preferred stock) and on parity with any additional Convertible Preferred Securities and any other class of capital stock or series of preferred stock. Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events.

This is directly from the 8-K and I'm wondering what could be construed as a CERTAIN EVENT. Perhaps the stock going below $18 a share and nowhere in the filing does it state that BAC can't short the company to nil in addition to making this investment. I can tell you from experience working in companies with heavily issued preffered stock that it gets the preferred their money back at the expense of the common shareholder even in liquidation. I'm sure BAC knew there would be a pop on the stock due to people thinking the pressure was off of the company. Good time to get some of your money back shorting with 140million share trading volume at levels up to 50% or greater price than the preferred issuance. This is referred to as the common practice of "Death Spiral Financing".

http://en.wikipedia.org/wiki/Death_spiral_financing

Although the best of faith in companies and people would lead one to believe that this is not practiced, this is business and banking and they are only in the business to make money at all possible costs. I don't think they are going to cover their shorts and take the profit. They will take the Loan Servicing group during the firesale.

I’m not saying you’re wrong as I can’t be 100% sure obviously but I have put money on this theory so if I am wrong I will pay dearly for it. Only time and money will tell.

[davelj]

capeman,

Yes, you alluded to my point (“certain circumstances”): What are these “certain events”? We don’t know. I suspect that that’s just standard legalese referring to stock splits, special dividends, etc.

I’m familiar with “death spiral financing,” also known as “floorless convertibles” (because the conversion price has no floor) – they are one and the same.

It does not state in the filing that BAC can’t short CFC’s stock, but in fact they cannot. At least according to Angelo Moz in an interview regarding the deal. While I’m sure he’d lie about many things, I’m guessing that he wouldn’t lie about this as it’s pretty straightforward. I’m sure this information, and more, will be in the final filing on this deal.

Again, I think this is probably rearranging the deck chairs. But I don’t think there’s anything nefarious about this deal – if it goes south, I think BAC will ride it into the ground and take big losses. If BAC can’t short the common, it’s very difficult to properly hedge this bet, although perhaps they could buy long-dated puts. But as we know, the only perfect hedge is in a Japanese garden…

[davelj]

capeman,

Yes, you alluded to my point (“certain circumstances”): What are these “certain events”? We don’t know. I suspect that that’s just standard legalese referring to stock splits, special dividends, etc.

I’m familiar with “death spiral financing,” also known as “floorless convertibles” (because the conversion price has no floor) – they are one and the same.

It does not state in the filing that BAC can’t short CFC’s stock, but in fact they cannot. At least according to Angelo Moz in an interview regarding the deal. While I’m sure he’d lie about many things, I’m guessing that he wouldn’t lie about this as it’s pretty straightforward. I’m sure this information, and more, will be in the final filing on this deal.

Again, I think this is probably rearranging the deck chairs. But I don’t think there’s anything nefarious about this deal – if it goes south, I think BAC will ride it into the ground and take big losses. If BAC can’t short the common, it’s very difficult to properly hedge this bet, although perhaps they could buy long-dated puts. But as we know, the only perfect hedge is in a Japanese garden…

[davelj]

capeman,

Yes, you alluded to my point (“certain circumstances”): What are these “certain events”? We don’t know. I suspect that that’s just standard legalese referring to stock splits, special dividends, etc.

I’m familiar with “death spiral financing,” also known as “floorless convertibles” (because the conversion price has no floor) – they are one and the same.

It does not state in the filing that BAC can’t short CFC’s stock, but in fact they cannot. At least according to Angelo Moz in an interview regarding the deal. While I’m sure he’d lie about many things, I’m guessing that he wouldn’t lie about this as it’s pretty straightforward. I’m sure this information, and more, will be in the final filing on this deal.

Again, I think this is probably rearranging the deck chairs. But I don’t think there’s anything nefarious about this deal – if it goes south, I think BAC will ride it into the ground and take big losses. If BAC can’t short the common, it’s very difficult to properly hedge this bet, although perhaps they could buy long-dated puts. But as we know, the only perfect hedge is in a Japanese garden…

[davelj]

capeman,

The “certain events” have been revealed, as the 8-K is now available. In fact, as I suspected, the conversion price can be adjusted if “certain events” related to stock splits and/or additional common shares, options or warrants are issued at a price (or strike price) below the $18/share conversion price. In other words, this is not a floorless convertible or death spiral convertible or whatever you want to call it. It’s a fairly standard covertible issue.

There’s nothing nefarious going on. BAC will stand or fall on this one in direct proportion to Countrywide’s ability to stay in business and make money (or not). Theoretically, BAC can hedge away some of the principal risk, but if that were BAC’s real concern the transaction would have been structured differently. Clearly BAC believes – rightly or wrongly – that CFC’s stock will be higher at some point in the future. (Personally, I think BAC’s wrong. But that’s just my opinion.)

[Author]

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