Current Price – $0.31
Expected Price – $0.0
Upside – 100%
Expiration Date – Jan 31st, 2018
This is a slightly different type of situation and involves shorting worthless equity at high borrow rates with a risk of short squeeze.
Rand Logistics (shipping company) entered prepackaged bankruptcy agreement with its second lien creditors and this agreement clearly states that:
“Existing common and preferred shareholders of Rand will have their equity interests cancelled without receiving any recovery or consideration and will cease to have an ownership or financial interest in the reorganized Company.”
So equity is worthless, but shares are still trading at $0.3.
Next dates are:
- 19th of Dec, 2017 – Chapter 11 bankruptcy proceedings due to start;
- 31st of Jan, 2018 – restructuring plan consummated and equity cancelled.
Borrow fees on IB currently stand at 100% and there are plenty of shares to borrow. If rates remain unchanged in 2 months borrow fees will consume 15% of return. (CORRECTION – due to round up to the nearest dollar, the effective borrow fees are 300% instead of 100% annually, meaning that in two months half of the upside will be consumed by borrow fees).
Risks
- Shorting is inherently risky, especially for penny stocks at 100% borrow fees;
- Short squeeze might happen and short-sellers might be forced to close out the positions at higher prices;
- Someone is buying the stock – most of the trading is probably done by day traders, but it is also possible that a some hedge fund will pull off a trick or two.
- Voluntary bankruptcy proceedings might get delayed;
- Equity holders might form an equity committee and object to the plan.
I expect the plan to proceed smoothly and asap – company is literally out of cash, burned $26m over the last half a year and has $250m in debt. Due to the possibility of short squeeze this is tiny position only.
Just curious, if this company goes to 0 or becomes worthless, would you still have to cover your shares in that event?
No, the shares get cancelled and the negative position should be simply eliminated.
Where did you get borrow? I looked at this a couple days back and couldn’t get borrow anywhere. How much were you able to get access to?
Yesterday IB had 200k shares to borrow.
Do you have an explanation for the price spiking to $1.9 on Nov 7th ?
I also wondered about that but there were no news. Seems like this was a simple pump and dump across all penny stock shipping companies (similar charts for TOPS, GLBS, SHIP). Also number of twitter messages is enormous, so plenty of day traders are likely involved in these darlings.
In any case this highlights the risk of shorting RLOG.
This may be a slam dunk, but the tail risk is astronomical even for risk arbitrage style trades. There’s not a possibility of someone buying this to get the NOLS ? (non operating losses carry forward).
Borrow fees, at least on Interactive Brokers, are computed on the stock price rounded up to the next dollar. In such case, that would more than triple the shorting fees to nearly 50% and not 15%. Is that correct?
You are correct – I was not aware of this rounding up. So effective borrow fees are not 100% but rather 300% annually. This makes the situation far less attractive. It might make more sense to enter this trade some time in January, closer to the expected share cancellation date (but borrow might not be available then).
I am unable to sell RAND short.There are no buyers at Ameritrade.
I am seeing plenty of liquidity through IB. Short sale restriction is currently in place – so short-selling positions can get filled only on the uptick.
Are you sure the shares will get cancelled immediately on the plan taking effect? Have you done this at IB before. My concern would be if it takes them a couple of months for the DTC to cancel the shares and you have to pay the huge borrow all that time…
I would expect shares to get cancelled shortly after restructuring plan is approved but I am not not sure about exact timing. Even if shares are not cancelled right away, approval of the plan is likely to push the price far lower. Borrow fees are also likely to drop after trading in shares is suspended. I shorted BINDQ past the distribution record date and still have the position now (trading was suspended in Oct 2016) and continue to pay borrow fees (which declined from 15% to 1% after shares were cancelled). For BINDQ this happened after a month of confirmation hearing, but procedure might be more straightforward for voluntary bankruptcy.
In any case situation is far less attractive with the 300% effective borrow fees (as clarified in the comments above) and I am looking to exit the position.
I have exited RLOG position – RLOG remains a terminal short, but keeping the trade on is no longer economic due to high borrow fees (and rounding up to the next dollar).
Shares trade now 30% lower compared to when I entered, but majority of profits has been consumed by borrow fees. Net gain is 10%.
Would you consider re-enter at January? In case of shorting share up to 0, it seems that the absolute price is irrelevant that anyway it will become 0 at the end – so you can still get your 100% return offseted by smaller borrow fees.
Actually, the absolute price is relevant due to the ’rounding up to the nearest dollar rule’ at least on IB – I am not sure if other brokers have the same rule, but IB notes this is a general industry convention:
https://ibkr.info/node/1146
The closer the price gets to zero the more expensive it is to borrow (always treated as if it is $1/stock for borrow fee calculation). Currently effective borrow fees stand at 550%. The only way I see reentering the position is if the borrow fees decline significantly.
Is the reason the borrower is ~300% as opposed to 100% which ib lists because the stock is trading at ~$.22 But you are paying interest at as thought it was $1. Is this calculation for all stocks or simply if it is below a certain level?
Yes, that is my understanding as well – for the calculation of borrow fees, the stock is treated as though it was at $1. This seems to be the rule (i.e. rounded up to the nearest dollar) for all stocks on IB and likely other brokers as well.