More Firms Abandon ‘Happy Meal’ Convertible Bond Financing Plan; companies that used the structure overwhelmingly experienced a significant stock-price decline within a short time afterward

More Firms Abandon ‘Happy Meal’ Financing Plan

Seaspan Is Latest to Back Away From Unusual Borrowing Method

MICHAEL ROTHFELD

Oct. 15, 2013 6:23 p.m. ET

More companies are shunning an unusual borrowing plan known as a “Happy Meal,” which has left some investors queasy. In the latest move, shipping company Seaspan Corp. SSW -0.84% last week abandoned a $125 million bond plan three days after its stock price plunged following the Oct. 7 announcement of the deal. In a statement, the Hong Kong-based company said the financing, which included a common stock offering and a convertible bond commonly known as a Happy Meal, “would not be in the best interests of our shareholders.”Happy Meal deals, named after the McDonald’s Corp. meal-and-toy combo, are a type of borrowing in which cash-strapped companies serve up all the tools hedge-fund investors need to profit: bonds that are convertible into stock if the company does well and a loan of stock to make negative bets, known as short sales, in case its prospects sour. The arrangement allows some investors to profit by balancing their positive bets on a company’s bonds and negative ones on its stock.

Happy Meal deals were the subject of an Aug. 20 page-one article in The Wall Street Journal examining the “shadow lending” system, in which investors have replaced traditional banks as lenders to struggling companies.

The Journal found that companies that used the structure overwhelmingly experienced a significant stock-price decline within a short time afterward. Bond traders and bankers who have taken part in such deals said the structure isn’t to blame for the poor performance; rather, they said, the deals generally attract weaker companies with fewer financing options.

In August, SolarCity Corp. SCTY +0.17% , a California energy-service provider backed by entrepreneur Elon Musk, disclosed without specifying a reason that it was scrapping the Happy Meal structure it had included in a previously registered securities offering.

On Friday, SolarCity announced another version of its financing, proposing in part to raise $125 million by selling bonds that are convertible into stock. But this proposal didn’t include a Happy Meal, meaning the company doesn’t plan to lend shares so hedge funds who buy the bonds can bet against it.

A SolarCity spokesman said the company is in a legally mandated “quiet period” before the financing and couldn’t comment.

Abengoa SA, a Spain-based alternative-energy company, also proposed a Happy Meal, along with a stock offering, in a securities filing on Sept. 26. In a second filing on Oct. 4, the company increased the size of its stock offering to 182.5 million shares but didn’t include the convertible bond with the Happy Meal structure it originally had contemplated. Abengoa’s representatives didn’t immediately comment Tuesday. Citigroup Inc., the company’s underwriter, declined to comment.

The Journal’s Aug. 20 article mentioned a whistleblower complaint about the deals filed with the Securities and Exchange Commission by Scot K. Vorse, a retired senior investment banker and former shareholder in one company that did a Happy Meal and later went bankrupt.

Mr. Vorse urged regulators to examine whether the share lending was improperly characterized in securities filings as a way for investors simply to offset the risk of their bond purchases, rather than the opposite, a way to bet against the stock, with the bonds being the hedge.

The SEC hasn’t taken any action.

The prospectus for Seaspan’s Happy Meal, unlike with many previous deals, broadened the language describing the share loan, which would be done through underwriterDeutsche Bank AG DBK.XE +1.34% , and how hedge funds that buy the bonds might use it. The disclosure said that although it had been told the shares would be used to offset risk from the bonds, “we cannot control the Share Borrower or its affiliates and their actual use of the short position created.”

Seaspan had intended to do an “opportunistic” financing for general corporate purposes, people familiar with the matter said.

The Happy Meal was included to attract hedge funds to buy Seaspan’s bonds, one of the people familiar with the matter said. By lending the shares, the company guaranteed the hedge funds interested in its bonds that they also could bet against its stock.

Hedge funds were to buy about half the bonds; the remaining bonds were to be bought by investors who didn’t plan to bet against the stock, this person said.

After the market closed on Oct. 7, the company said it would sell up to 8.5 million shares, including up to 2.5 million to be borrowed by Deutsche Bank for the Happy Meal.

Seaspan’s share price opened lower the next day and continued to fall amid a wider market decline. Three trading days later, Seaspan’s stock had lost 17% of its value. That afternoon, not wanting to price their offering so low, Seaspan executives canceled the deal. The company’s share price is up 7.5% since then.