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Death Spiral Financing

Death spiral financing is a convertible debt or equity arrangement in which the conversion price floats at a discount to the market price, causing the share count issued on each conversion to increase as the stock price falls. The financier converts, immediately sells the discounted shares into the open market, and pockets the spread between the conversion price and market price. That selling pressure drives the price lower, triggering progressively larger dilutive conversions in a self-reinforcing loop.

HOW IT WORKS

The toxic feature is a floating conversion price, typically set at a 20–40% discount to the lowest volume-weighted average price over a recent lookback window of 10–20 sessions. When the financier converts a tranche and sells, the resulting downward price pressure lowers the reference VWAP, which lowers the next conversion price, which generates even more shares for the same principal amount. Because the financier's profit is the discount itself rather than the stock's direction, there is no incentive to support the price. The cycle continues until the stock collapses or the company restructures. Not every convertible note is toxic: fixed-price convertibles do not create this feedback loop because the share count does not grow as the price falls.

IN TAPEBOARD

Traders use Tapeboard's filings feed to screen for the structural language that signals death spiral financing — phrases such as "conversion price equal to a discount to the lowest trading price during the measurement period" in 8-K filings and note agreements. Short sellers treat confirmed death spiral structures as a fundamental short thesis, since the financing itself guarantees future sell pressure independent of company news. Long-side traders apply it as an exclusion filter, flagging any micro-cap showing convertible notes with floating conversion prices, variable-rate equity lines, or repeated amendments increasing note principal.

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