Open Access Senior Honors Thesis
Accounting and Finance
Dr. Yu Zhang
Karen Ann Craig
Death spiral convertibles, are a type of loan lenders give to a firm in exchange for a right to convert into equity at below market prices. This differs from traditional convertibles because there is no fixed conversion price. Instead, the price can be reset lower if the firm's stock price falls below the conversion price at the time of issuance. As the process repeats itself the stock's price spirals downwards. This process benefits the bondholders at the cost of the shareholders. Based on a hand collected sample of 23 companies issuing a total of I 97 floating price convertibles, the stock price declined an average of 62.04% from the first issuance to the last issuance of a floating price convertible. On average the companies on our sample issued their first floating price convertible within one year of IPO. Companies that saw the greatest decline in stock price shared two important factors. First, their total floating price convertibles issued was over$ I million. Second, they issued more than five floating price convertibles. Despite the floating price convertibles having negative effects on a company's stock price in general, the funds can keep the company alive. Three out of the 23 companies in our sample saw their stock price increase from the time of the first issuance to the last issuance of a floating price convertible.
Dwyer, Austin, "Death Spiral Convertible Bonds" (2017). Senior Honors Theses & Projects. 543.