AmTrust Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of property and casualty insurer AmTrust Financial Services (Nasdaq: AFSI  ) were getting walloped today, falling as much as 11% in intraday trading after the company announced the pricing of convertible senior notes.

So what: The new notes seem to offer a darn good deal for those who can get their hands on them. They are unsecured, but senior, which means they occupy the highest position in debtor hierarchy if anything happens to the company. They also contain a provision that holders can require the company to buy the notes back at 100% of the principal value if there's a "fundamental change" at the company. The notes pay annual interest of 5.5% and provide equity-like upside by offering holders to convert common stock at a conversion price of $31.83 per share.

Of course, what's good for the new debt holders may not be as good for common shareholders. Like all debt, the new notes have preference over equity, and the interest paid eats away at the profits available to stockholders. Plus, the conversion feature has the potential to lead to share dilution.

Now what: Though there's potential downside for shareholders any time a company raises new capital, the real question is whether the company will use the money wisely. If it borrows at one rate and is able to invest in projects that produce higher returns, shareholders will make out in the end. So to that extent, AmTrust investors will have to wait to see whether the company can make this round of funding pay off.

However, the terms of the debt aren't particularly enticing from the debtor's perspective, so no matter what AmTrust does with the new money, it's not a great sign that it needs to offer terms like that to borrow.

Want to keep up to date on AmTrust? Add it to your watchlist.

The Motley Fool owns shares of and has a protective collar on AmTrust Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool,or on Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1744016, ~/Articles/ArticleHandler.aspx, 12/20/2014 8:04:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement