Can someone explain why in both this latest offering and the one prior, Morgan Stanley has come through with a huge amount of additional shares to borrow? It's like feeding the pipeline to shorties?
or is there something about it that is unique such as enabling Moli to short as many shares as they buy to secure no downside risk on the new shares....yet feed money to the company to keep it afloat....just cannot figure out why they would bring to the table so many new borrowed shares???.
I think the loaned shares were to drive the sale of the convertible debt. The Notes are repaid in common stock. So you lend $1000 to Molycorp and receive 5.5% per year interest and in 2018 (date?) receive 138.89 shares of common ($7.20 share price). If you were uncomfortable with the idea of 139 shares in 2018 at $7.20, but you could borrow 50 shares today and sell them at $8-ish, then the net situation is $600 outlay ($1000 loan minus $400 for short position), then you pay interest on the borrowed shares (unknown what MCP is getting), collect the $55 each year for 5 years ($260 total), and then get 139 shares in conversion, cover and have a net 89 share position.
The 5.5% interest was quite low. The things that drove the sale were the fact that the conversion price was BELOW the market price and there were shares to borrow and use as a short hedge. Considering that the market price was at $8, one could sell 125 shares at $8, collect interest on the loan, pay interest on the shares borrowed, and in 5 years get a net of 14 shares. It is a short against the box (2018 shares after conversion), so there is no possible short loss.
Convertible debt ALWAYS leads to shorting as a hedge. Molycorp may have been facilitating that hedging. I don't see how they got 5.5% without that.
I think the smart play was to lend the money and collect the interest $55 per year, with the idea that a 5-year hold of MCP is a good investment. But that takes a long term view. Many of the debt notes may plan a later short at a higher price ... say you short 50 shares, but wait for 10 per share, or $20 ...
There are many investors in the market that kill by taking the long term view, a 5-year loan to Molycorp with a conversion into $7.20 shares (and that was 10% below market at that time) takes some foresight, but it is a good investment. Now that I see it I wish I had sold my stock and bought the notes. 5.5% per year, and below market shares ... it was a good deal.
Aaasky...I believe MCP loaned shares to MS for the very specific purpose of driving the share price down for the equity secondary and debt financing to create deman d by tgek. That event has occured, successfully. The share price is now being supported by MS' s buy back activities. Once completed, you will find MCP either shorted by high-risk folks or run up by a lot of believers in the MCP story. I believe we are going to see a 50-100% run up soon.