What are the red flags investors should look for when their companies do these kinds of private placements?
I think the important thing to keep in mind is that the “death spiral” or floating-rate convertible is not an evil instrument. It is not going to cause the mass destruction that’s been advertised by the media. What happens with the death spiral, though, is that if the company is having some fundamental problems, and the stock price comes down even just a little bit, the death spiral is going to amplify that effect. You’re going to have a situation where the investor has the ability to convert and sell [stock] at increasingly lower prices, based on where the market is. And what happens eventually is that you’re going to have the investor converting a part of the security and getting a bunch of stock which they then have to sell into the market, further depressing the market, and when they go to convert again, they’re going to get even more shares at a lower price. And that’s why you get that so-called “death spiral” effect, where it’s just a circular pattern going lower and lower. Howev
