Death Spiral Convertible Just Refuses to Die

To some degree, every PIPE deal, not just death spirals, is a bit of a Faustian bargain for a company. In selling discounted stock or a bond that converts into discounted shares, the company hopes all the extra shares coming into the market won't depress the price of its stock.

PlacementTracker reports that six months after a death spiral convertible is placed, the stock of the issuing company is down, on average, 7%. Yet, ironically, death spirals are not the worst-performing PIPE deals.

PlacementTracker says companies that sell bonds with a so-called "convertible reset'' conversion provision often see their shares plunge by 26% six months after doing a deal. A convertible reset PIPE is a modified death spiral that doesn't have an endless conversion feature.

Indeed, the NIR Group, which mainly invests in death spiral PIPEs, reports having some stellar annual returns. The NIR Group's AJW Offhore hedge fund is up 6% this year, after rising 17% last year, according to a report sent to the hedge fund's investors.

One hedge fund manager who didn't want to be identified says most investors in death spiral deals want a company's stock to go up. He says the floating convertible is intended to provide protection to investors. He says there's more money to be made from a company's stock rising than falling.

The hedge fund manager says death spirals unfairly got a bad reputation because of abusive short-selling by some rogue hedge funds.

Casper Hallas, a portfolio manager with Denmark's Scandium Asset Management, agrees with that sentiment. He says his fund invested with the NIR Group because he likes PIPE deals with a floating-conversion feature. He says the downward-conversion feature provides added protection for investors.

"If the market goes down, you convert at the lower rate,'' says Hallas. "Having a floating rate is a little bit like riding a put.''