Toxic Debt, What is it and why do I care?

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What is Toxic Debt, and why do I care about it?

The OTC exists soley for CEO's to make money by printing shares, via "Toxic Debt Financing"

What is Convertable Debt?

https://stockwiki.org/Convertible_Debt

"How it works A cash-strapped company is in need of funding for operations. Regardless of whether or not it's a company with well-intentions, they're going to need money. Many of the times, they go to lending companies in the exchange for shares. These shares can be converted, sometimes in as little as 90-120 days (or up to a year in the case of a 504-D transaction). Most companies can take in up to a million dollars a year in this type of funding. The exchange basically goes something like this: "The [company] has taken $15,000 in funding. In exchange, the [funder] has agreed to a conversion rate between the lesser of .0015 or the average bid price"

"The conversion rate is extremely important Conversion rates can go as low as .0001 (i.e. for every $10,000 owed the lender gets 100,000,000 shares) - to the more favorable conversion rates such as (85% of the average bid price over the last 5 days). On a side note: conversion rates like this should be acceptable when investing in penny stocks, it shows that the lender had to have some sort of belief that they [the company] would succeed (IMO). However, you have to remember dilution is dilution - at a minimum, you should expect your shares to fall in value proportional to the amount of new shares entering the public float (i.e. a 25% increase in the public float devalues each share by 25%). Manage your risk accordingly!"
(credit stockwiki)

DEFINITION of 'Toxic Debt'

Debt that has a lower chance of being repaid with interest. Toxic debt is toxic to the person or institution that will receive the payments.

This debt generally adheres to one of the following criteria: default rates for the particular debt are in the double digits, more debt is accumulated than what can comfortably be paid back, the interest rates of the obligation are subject to discretionary changes. Any debt could potentially be considered "toxic," if it imposes harm onto the financial position of the holder.

http://www.investopedia.com/terms/t/toxic-debt.asp

BREAKING DOWN 'Toxic Debt'

Debt is not always bad, especially if you are the lender and the borrower is making the payments. If the payments on these loans stop coming in, or are expected to stop, the debt becomes known as toxic debt. The historical costs of toxic debt securities are higher than the current market price. This can often result from unjustified high credit ratingswhich implies that the risk of default on the security is much lower than fundamental analysis would suggest. Junk bonds are not classified as toxic debt upon purchase, because the buyer is aware of the underlying risk of these securities.

Cheds Breakdown:
Toxic debt is the reason why your stock is not moving. VFIN is blocking the ask and BMAK is selling into the bid. This is the name of the game, so you need to know how to spot these guys.

http://www.hotstockmarket.com/t/61503/toxic-financing-in-depth

Thoughts from Sooah Moon courtesy to @bb2stocks

On most OTC pigs, we can assume that most notes cannot be paid off before/at maturity so they will convert. Notes issued by fully reporting issuers have a six month holding period hence they become convertible 6 months and 1 day from date of note (in practice when the note is fully funded). So, the O/S as of November 13th reflects--and this is an assumption based on industry practice--all notes dated May 12th and earlier converted. If you go to the filings on sec.gov, you can pull up one of their notes--should convert 50-60% discount to market, this is pretty standard so I don't think a noteholder converted at 2c any time this month. Conversion of notes do reduce debt from the books, yes.

See below a real world example of Toxic Debt and how it plays. This post and below is from early November just after fins came out:

$GDSI is/was a good play, and started to run on anticipation of a reverse merger. PR's came out and everyone started talking about how share price should be $1.00, or 50 cents. The only problem is that the current PPS was around .0040

I played $GDSI and did well, and then fins came out on Friday November 6th. After reading the fins, I discovered that there was a lot of toxic debt that would need to be converted. That Sunday, I spent a lot of time on the IHUB message board talking about the fins, and trying to warn people not to get too excited yet.

I went through a similar situation with $VPOR and $MTVX, but more so with $MTVX. They RM'd but there was a crushing amount of debt that would need to be converted, and unsuspecting shareholders thought the RM would just bring the price to $1.00 and everyone could retire, except thats now how it works.

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Here is a conversation I had with an IHUB proponent.

C.R.T	Saturday, 11/07/15 12:21:59 PM
Re: Cheds post# 13772
Post # of 13864

A conversion rate of .01 would imply the stock trading at .018 .019 by February 2016.

Please review your statements before posting...

Cheds	Saturday, 11/07/15 03:58:31 PM
Re: C.R.T post# 13776
Post # of 13864

I understand. I am just highly skeptical given the sheer $$ amount. Now, in this type of RM situation its either going to be run up first, or they might just pound it down as soon as each note becomes available.

The shell allows the other company to trade on the exchange, and what the shell offers in value to the company is the ability sell a large number of common shares to generate quick cash/operating money. A large percentage of the shares sold in this situation are just to cover administrative costs in terms of executing the transaction, lawyer fees alone probably 30-40%

So, lets not pretend that there is no chance we are going to see some debt convert here. OS is tiny as I posted today (480M range)

With the 650M AS lets not pretend they are going to keep the OS at 480. BMAK has been in the box every day, or this would be well over a Penny

We also have the statement from the company in the 10Q that they intent to raise the AS in order to allow the conversions.

Im sorry that i am so skeptical, Ive only become this way after riding a half dozen very similar plays

I hope they let this run, that could be fun

BigCheds
Cheds Trading