If each shareholder acts in self interest and does not take up any potential offer, the company could head to a liquidity trap and go belly up. Clearly, the lending shareholders will not want to see this so they are most incentivised to take up their rights; but the issue is whether they can contribute enough on their own, and keep the market cap and cashflow position respectable enough, to enable the high yield debt placement ? Time will tell.
Naturally, shareholders will want to do the bare minimum to help the company get out of this situation, but if each shareholder was told the company goes bust without the additional cash will that necessarily encourage take up? Perhaps. But perhaps it will also trigger a race to the exit. A little chicken and egg.
I hope my pessimism is overdone.
DML Price at posting:
34.0¢ Sentiment: None Disclosure: Held
