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
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.
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