Q: Unsecured convertible loan stock?

[willmoss]

Can someone help me with this question regarding unsecured convertible loan stock? I am investigating GMA Resources Plc (which is no longer listed actually), but for point of reference in January and May they issued a RNS note regarding their share price. It mentioned that they have 'unsecured convertible loan stock' issued. I am a little unclear as to what this is, as I thought convertible loan stock was by definition secured

Loan Stock Definition | Investopedia

' A secured loan stock may also be called a convertible loan'

Here's the text from the RNS:

"The Company currently has 618,002,894 Ordinary Shares in issue and there is, in aggregate, approximately £5.5 million of unsecured convertible loan stock which, together with accrued interest, is repayable in full on 31 December 2012, if not converted before that date. Conversion is at the option of the holder at any time prior to 31 December 2012. The conversion price on the loan notes is between 2.25p and 5p"

FE Investegate |GMA Resources PLC Announcements | GMA Resources PLC: Statement re Share Price Movement

As no conversion ratio is stated, I am assuming then that if the share price goes above 3.625 (middle of 2.25-5p) the holder of the loan may receive 1.52m ordinary shares? (5.5/3.625)

Can anybody knowledgeable confirm this? Thanks in advance

 

[scose-no-doubt]

they'll receive 5.5/0.03625 or 151m 1p shares @ a value of 1.51m for an investment of 5.5m

why would anyone take the option to convert and why is the loan unsecured. The loan is 12x the market cap of the company... something dodgy going on here.

 

[willmoss]

Makes sense. Thank you. Without having done any further investigation, I'm guessing the loan was made before the share price plunged (when the share price was over 10p). That would answer all your questions!

they'll receive 5.5/0.03625 or 151m 1p shares @ a value of 1.51m for an investment of 5.5m

why would anyone take the option to convert and why is the loan unsecured. The loan is 12x the market cap of the company... something dodgy going on here.

 

[scose-no-doubt]

Point is if that's real then somebody did pi55 poor due diligence and credit checking - it's a bit unlikely. Even at a quid a share that loan would still be clocking in at over 75% of market cap. Sounds like some sort of scammy bollox to me unless it's some kind of small scale investment vehicle - but given the participants and their demographics it makes no sense that they're AIM listed unless they're trying to tap into a rather meagre bit of equity issuance capital which brings us right back around to scam. Why chase AIM pennies when you've got access to millions in bonds? Then again it may be legit and, imho, they could have a) struck out on their mining b) been shut down by corruption.
Just two of many possibilities so who knows? I'd steer clear myself.