In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, August 23, 2007

CFC: More info

by Calculated Risk on 8/23/2007 07:45:00 PM

UPDATE: I'm not sure how appropriate my initial speculation was for this forum, so I changed the title and made some minor edits to the post. To be clear, I'm not offering investment advice and I have no position in CFC. CFC is a key player in the mortgage business, and I think they should disclose more on these convertibles.

One of the puzzling aspects of the CFC convertibles was this sentence in the 8-K:

Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events.
What are these "certain events"?

Back in the late '90s, some very weak companies issued floorless convertibles to raise cash. These convertibles had an announced price, but when you read the details the conversion price was adjustable based on the price of the company's stock.

Here is a definition of a death sprial or floorless convertible:
Used by companies that are in such bad shape, that there is no other way to get financing. This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as toxic convertibles or death spiral convertibles.
And there is this story from Dow Jones: OCC: BOA Can't Convert Countrywide Secs Into Cmn Stock
Bank of America Corp. (BAC) can't convert its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, the Office of the Comptroller of the Currency said in its letter approving the investment.

"Our conclusion is subject to the condition that (Bank of America) will not exercise the right granted to holders of the Securities to convert the Securities into common stock of (Countrywide) so long as the Securities are held by (Bank of America) or any subsidiary" of Bank of America, OCC chief counsel Julie Williams wrote Wednesday in a letter obtained by Dow Jones Newswires.

Williams said this condition was enforceable under the law. The letter was addressed to Bank of America general counsel Timothy J. Mayopoulos.
...
Williams also said that Bank of America's investment would not "confer voting rights" as long as the "yield is current and the issuer is not attempting to alter the holders' rights under the instrument."
...
The OCC said that despite the investment being labeled as a purchase of preferred securities, the agency would treat it as a purchase of debt instruments....
added: Hopefully these "certain events" are unrelated to the stock price. Also, it's hard to imagine that BAC would invest in floorless convertibles. I believe CFC should disclose the "certain events" as mentioned in the 8-K.