Twisting the knife

24 June 2008 By Lauren Silva

Capitalraisings by National City, Merrill Lynch and WaMu, among others, allow the retroactive repricing of shares if they raise additional cash. They have no lower price limit. This can be painfully dilutive to other shareholders, and could even turn into a death spiral.

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Merrill Lynch had a "full ratchet" in its $6.6bn issuance of mandatory convertible preferred stock issue, primarily from Korean Investment Corporation, Kuwait Investment Authority, and Mizuho Corporate Bank. If the company sells or agrees to sell more than $1bn of any common stock or convertible securities within one year of closing at less than the convertible price, the conversion ratio for the preferred stock will be adjusted to compensate the investor on a "fullratchet" basis.

Washington Mutual had a full ratchet on its $7bn issuance of stock and convertible shares to TPG and other large investors, with the protection lasting 18 months for TPG and nine months for other investors and kicking in if WaMu sells more than $500 million of common stock or other equitylinked securities at a per share price less than $8.75.

National City has a full ratchet price reset in its $7bn stock and convertible stock deal with Corsair and large investors. If within three years (which may be shortened to two years in certain circumstances) the company sells more than $300 million of common stock or other equitylinked securities at a price less than $5 then the company will be required to pay Corsair an amount sufficient to compensate it fully.

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