Toxic financing
Also called: toxic convertible, toxic deal, death spiral financing, toxic lender
Market slang for financing structures, such as floorless or variable-price convertibles and aggressive price resets, whose share issuance grows as the stock price falls.
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What the term describes
"Toxic financing" is informal market vernacular, not a legal or accounting category. It refers to deal structures in which the number of shares the company may have to issue is not fixed, and rises when the share price falls. The usual ingredients are:
- floorless convertibles or other variable-price conversion terms, priced at a discount to a recent low;
- long lookback windows using the lowest price in the window;
- ratchets, especially full ratchets, that reset warrant or conversion prices to any lower future deal price;
- warrant terms that multiply the share count on a reset, or alternative cashless exercise formulas;
- default provisions that add penalty amounts which are themselves convertible.
Not every convertible or market-priced deal fits the label. A fixed-price convertible, or a variable-price structure with a meaningful floor price, behaves very differently.
The term "toxic lender"
Traders also use the phrase "toxic lender" as slang for an investor that regularly provides these structures. Signal8 does not label counterparties this way. Its content describes the deal terms a company has agreed to, which are in the filings, rather than characterising the investor.
Worked example
Hypothetical: Company X issues a $3,000,000 note convertible at 80% of the lowest VWAP in the prior 15 trading days, with no floor, and warrants with a full ratchet. If the lowest VWAP falls from $1.00 to $0.50, the conversion price falls from $0.80 to $0.40, doubling the shares issued per dollar converted. Any later sale of stock below the warrant price also resets the warrants. See death spiral for how this can compound.
How to spot it
Read the conversion and adjustment sections of exhibits filed with 8-Ks under Items 1.01 and 3.02. See Toxic convertibles.
Related terms
Guides that use this term
Toxic financing · 6 min read
Toxic Convertibles Explained, From Variable Conversion Prices to No Floor
How variable-price convertible notes work, why a discount to VWAP and a lookback window matter, and what happens to share counts when there is no floor.
Toxic financing · 5 min read
Resets and Ratchets: How Anti-Dilution Clauses Multiply Share Counts
Full-ratchet and weighted-average anti-dilution explained, with a worked share-count table as the price falls from $1.00 to $0.10.
Toxic financing · 6 min read
Ownership Blockers: Why 4.99% and 9.99% Caps Do Not Limit Total Dilution
How beneficial ownership blockers work, why they cap a holder's stake at any moment but not the total shares issued, and a worked convert-and-sell cycle.
Toxic financing · 6 min read
Spotting the Lender: Finding Deal Terms and Counterparties in SEC Filings
Where a financing's terms and counterparty are disclosed, from 8-K Items 1.01 and 3.02 to the securities purchase agreement exhibit, with a phrase checklist.
Toxic financing · 6 min read
The Reverse Split Dilution Cycle: Split, Register, Convert, Repeat
How reverse splits, resale registrations and convertible financings can repeat in a cycle, with a timeline and a worked share-count example.
Toxic financing · 6 min read
Prepaid Advances: Cash Up Front, Repaid in Discounted Shares
How prepaid advance agreements work, how the discount, lookback, floor and cash-payment triggers decide the share count, with a worked example.
Toxic financing · 6 min read
Lesser-Known Adverse Terms: Undisclosed Balances, No Maturity, Partitions and MFN
Financing terms that rarely make headlines but change how much dilution a deal can cause, from partitioned notes to MFN and participation rights.
Research pages · 6 min read
How to Read the Dilution Pressure Score: Score, Max Measured and Risk Levels
The seven components of Signal8's Dilution Pressure Score, why it reads as points out of points measured, and how the risk levels and lower bounds work.