How to profit, even with rock-bottom stock price

LionGold, a firm affected by the 2013 penny stock crash, issued redeemable convertible bonds to VCAM last year. Such "death spiral" convertibles are usually issued by companies that are short of money, and have no other alternatives.
LionGold, a firm affected by the 2013 penny stock crash, issued redeemable convertible bonds to VCAM last year. Such "death spiral" convertibles are usually issued by companies that are short of money, and have no other alternatives.ST PHOTO: DESMOND FOO

Value Capital Asset Management shows a way with LionGold

How do you make money on stocks that are stuck at the rock-bottom price of 0.1 cent?

The answer is to exercise so-called "death spiral" convertible bonds at an even lower price.

Value Capital Asset Management (VCAM) has done just that, raising eyebrows and triggering unusual volume movements in the shares of LionGold and Magnus Energy, two firms that have never recovered from the 2013 penny stock crash.

On Monday, Mr John Poon Seng Fatt, a director of VCAM, exercised his right to convert $300,000 worth of LionGold convertible bonds into 375 million shares at 0.08 cent apiece. The lowest possible trading price for a stock is 0.1 cent. So on paper, he was already $75,000 richer.

VCAM's stake in LionGold jumped immediately from 1.08 per cent to 12.47 per cent, or 406 million shares. But that same day, a whopping 510 million LionGold shares changed hands, with the counter ending unchanged at 0.1 cent. This suggests that VCAM could have sold some of the shares.

On Tuesday, VCAM converted $100,000 worth of bonds into another 125 million shares at the same discount.

"Death spiral" convertibles are so called because converted shares are listed at huge discounts to the market price, and can erode a share's price over time, on top of seriously diluting investors' existing shareholdings.

So these instruments are usually issued by cash-strapped companies that are out of alternatives. In LionGold's case, it proposed to issue up to $100 million redeemable convertible bonds to VCAM last June and issued its first $1 million sub-tranche last September. The bonds have a 2.5 per cent coupon and are due in 2018.

Magnus Energy inked a similar deal in 2014, to issue up to $35 million convertible notes due in 2017 to VCAM. VCAM has been converting and selling shares since then. On Tuesday, it converted $400,000 worth of notes into 444 million shares at 0.09 cent apiece, below the market price of 0.1 cent.

About 435 million shares changed hands that day, and the counter closed unchanged at 0.1 cent.

Meanwhile, a third company linked to the penny stock crash - ISR Capital, formerly known as Asiasons WFG - has been the subject of repeated queries from the Singapore Exchange requesting better disclosure, to which ISR has given terse replies.

In May, a share sale by VCAM to Mr David Francis Rigoll, a former director of Tantalus Rare Earths, gave him a major stake in ISR Capital and a seat on its board. Last week, Md Wira Dani Abdul Daim, the son of a former Malaysian finance minister, stepped down from the boards of ISR Capital and LionGold after being made a bankrupt.

A version of this article appeared in the print edition of The Straits Times on August 25, 2016, with the headline 'How to profit, even with rock-bottom stock price'. Print Edition | Subscribe