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).
- 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.