internet startup with risky investments). She would also have the opportunity to convert the debt to equity
at a set price if the company does very well. Two general scenarios could happen:
Ubid fails within the next few months, and Creative Computers is extremely negatively affected.
Creative Computers is heavily invested in Ubid (has more of an investment in Ubid than its own
market capitalization). Because Creative Computers possesses a good amount of assets, there is more
collateral available from Creative Computers to help get new loans if the company is reorganized or
to pay back holders if it is liquidated, while Ubid does not have nearly any assets to even pay back all
of the debtholders, much less keep any value for the equity holders. If Ubid continues to produce
negative earnings and default on its loans, it will probably have to liquidate its assets because it hasnt
proven its business model, and it probably wont ever reach profitability. This could then could hurt
Creative Computers stockholders equity value. If Creative Computers then breaches covenants due
to a failure of its major investment, it will be forced to satisfy its debt holders. Because Creative
Computers has numerous successful business lines, the restructuring would probably be a
reorganization (Chapter 11). If Elena takes convertible debt and the company is able to pay off all of
the senior debtholders and then can pay her, they will. If they cant pay her, then she would take
control of the company (which has been very successful in other core businesses) and equity holders
will lose all value. If they cant pay all of the senior holders, that holder would take control. In this
case, her debt would either move up a few tranches (giving her higher priority on future
restructurings) or she gets a new debt contract with more of a premium on the interest rate and
principal payment or both.
Ubid thrives and Creative Computers makes a ton of money on its investment.
Ubid does very well and begins to make a profit. Creative Computers makes a ton of money on the
sale of Ubid shares to its own shareholders (even if its at a slight discount). Elena will then have the
option to convert her debt holding to an equity holding in Creative Computers at the agreed upon
strike price and could take part in Ubids and Creative Computers massive mutual upside.