Michael wrote:
- quote -

Not specific to Merrill...many possible scenarios here...

If the existing issue is a straight preferred, and the new issue is a
common, then the dilution should have little effect because that
preferred is little more than a dividend-payer (little/no upside
potential). If anything new new capital should buy some time for the
company to continue its preferred dividends, rather than suspending them
(if things have gone so far south that there's a risk the company can't
pay them). So that raise could benefit the preferred despite the
dilution of common shareholders.

If the new issue is another class of preferred, and it has higher
priority with respect to payment of dividends, or in
liquidation/restructuring in bankruptcy, then yes the dilution affects
the existing preferreds. Someone just got in line ahead of you, which
could become an issue if there isn't enough to go around.

There is a general risk as well, regardless of type - that the terms of
the capital raise signal to the market that the current state of the
company is worse than perceived. For example when a common is issued at
a price well below the current market price, that can affect the
perception of the company and the value of its preferreds. The
preferreds of a company teetering on the brink of bankrtupcy are almost
as likely to become worthless as are the common shares.

Another scenario - if the existing preferreds are convertible to common
shares, then the dilution affects the value of that embedded call
option. It becomes less valuable, to the extent of the dilution, though
that could be offset by improvement in the company's prospects for
remaining in business. After all that convertible option is worth $0 if
the company files for bankruptcy.

-Tad

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Does anyone know if stock dilution (as we are hearing about in regard
to Merrill Lynch) affects preferred shares as well as common shares?

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