But on Monday, all of the mechanisms that were supposed to keep UST stable weren’t. In summary, it’s the crypto dream.Ī month ago, the future looked bright for Terra and its main backer Do Kwon: A consortium called the Luna Foundation Guard aimed at providing collateral for Luna - then at an all-time high value of $US119 - had bought more than $US1.5 billion in Bitcoin to shore up UST’s peg, with its members reading like a Who’s Who of crypto. By using software programs to manage the token’s volatility, the opportunities for profiting off arbitrage are even greater - DeFi lender Anchor Protocol was known for offering market-beating rates of up to 20 per cent to traders willing to deposit UST on its platform. The point of projects like UST is to enable crypto traders to make transactions easily and quickly without needing to leave the digital asset ecosystem, rely on intermediaries or worry about the value of their coins going up and down. However, the effects on ACB shares would likely be outweighed by convertible hedging and additional shorting given the size of the issue and the stock's liquidity.Terra founder Do Kwon is now attempting to raise $US1.5 billion from new and old investors alike to provide more collateral to UST, hoping to rebuild the token’s liquidity Credit: Bloomberg While the financing structure will be a significant technical headwind into November 25, shares could find support if the broad cannabis sector experiences a sharp rally or short squeeze. The below table outlines the dilution that ACB will suffer under various price scenarios. The more they hedge, the lower the price goes. It’s a vicious cycle: the lower the price of ACB, the more the debenture holders need to hedge. The staggered repayments allow holders to begin hedging or shorting this week without the need for borrow. The second part of the repayment is based on the VWAP over the whole week (November 18 to November 22) and paid in shares on November 25. This is extremely advantageous as it allows the funds to receive shares in a standard T+2 settlement, thus obviating the need to borrow shares. The debenture holders have cleverly negotiated a two-part repayment: the first, based on the average daily VWAP from November 18 and 19, is paid in shares on November 20. The supplemental indenture filing reveals a very deliberate structure that allows holders to lock in gains by hedging out shares of ACB over the course of this week. Note the 80M shares figure assumes the share price stays at the current $3 CAD over the next 5 trading days - but this number could increase significantly if the share price were to drop in a meaningful way. It appears that a few sophisticated hedge funds have negotiated this repayment structure which allows them to hedge out the debenture without needing to borrow shares, meaning they can begin selling the approximately 80M shares that would be needed to hedge the entire $230M debenture issue. While Aurora shares are down ~30% since the announcement, the potential downside is even lower given how punitive this repayment structure could be for existing shareholders. They pitched it as a measure to "strengthen" the balance sheet, when in fact it exposes shareholders to the potential of virtually unlimited dilution. Management was vague about the true mechanism of the repayment of the 2020 debenture. Theoretically, the death spiral can end with the stock at or near a zero dollar value." This, in turn, encourages more conversion because the convertible debt owners can obtain - and then sell - even more shares of the stock with the fixed value feature. If this bond is converted into stock, the price of the stock tends to drop due to the increased supply of shares. The convertible bond, unlike a conventional convertible one, converts into a fixed value instead of a fixed number of shares. The fact that Aurora was forced into this extremely dilutive option should signal caution in the cannabis sector.įrom Investopedia: " A Death Spiral is a term applied to a type of convertible debt that stimulates an ever-increasing number of shares, leading to steep stock price drops. In the press release, Aurora announced the equitization of CAD $230M of convertible debt (with an original exercise price now far out-of-the-money) in a classic "death spiral" structure. On Thursday, November 14, Aurora Cannabis (NYSE: NASDAQ: ACB) quietly issued a press release alongside its earnings release.
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