Death Spiral

What does it mean?
A type of loan investors lend to a company in exchange for convertible debt, which, like a convertible bond, typically has provisions that allow the investors to convert the bonds into stock at below-market prices. This can lead to the original shareholders losing control of the company.

In Other Words...
This type of loan is undertaken by companies that desperately need cash. It is called a death spiral because companies' stocks often plunge drastically after they take on these types of loans. Investors can short the company's stock and try to drive its price down. The falling price results in more shares for the investor who chooses to convert. The short position can be closed out with the shares received from the conversion.

Related Links
Short Selling Tutorial - Have you ever correctly predicted a stock's decline or wondered how to be profitable in a bear market? Here you can learn how short selling works and the risks involved in it.

Related Terms
Convertible Bond | Convertibles | Credit Cliff | Short

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