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By Nigel Somerville, the Deputy Sheriff of AIM | Monday 4 December 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I note the comments made by Cynical Bear as he analysed the stonking collapse in the shares of AIM-listed Tern (TERN) and wondered if this would be the worst ever example of the death spiral. It seemed that there was little untoward in the disclosed details of the funding package, but there is one omission which leaves me thinking that the collapse is set to continue.
Of course, we don’t know what expenses are being paid by Tern, and we don’t know if the loan notes were subscribed for at face value. But there is still another matter. What we are told is that the loan notes are convertible at the lowest closing bid price in the 3 days leading up to the notice to convert being issued.
So what is missing? It is this: usually there is an assurance that the death spiral finance provider will not short the shares. This would mean that the death spiral finance provider can’t go short of the stock but it doesn’t provide against it selling shares and covering its position by converting.
But in this case there seems to be nothing to prevent the death spiral finance provider from selling the shares short. As such, it looks as though the 3 day conversion mechanism is meaningless - Mr Death Spiral has 20 days to play.
So it looks as though Mr Death Spiral can sell the hell out of Tern on a T+20. This can continue for 20 days before it has to issue a conversion notice, and get the lowest closing bid price scored over the final 3 days. Needless to say, that will be a heck of a lot lower that it started selling the stock, resulting in a stack more shares being issued as well as a much lower price.
Perhaps Tern would like to issue a clarification?
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