new york -- Normally a company might complain when speculators drive down its stock price. But home builder Standard Pacific Corp., underscoring the housing industry's woes, is helping investors place bets against its own shares.
In a deal that's so counterintuitive it almost sounds illegal -- though experts say it isn't -- the Irvine-based company said Monday that it was selling $100 million in bonds that can be converted into its stock. At the same time, Standard Pacific in effect is lending 7.8 million of its shares to buyers of the bonds, who will promptly sell the stock.
"I don't know that there is any legal barrier to doing that, but it is going to greatly antagonize your stockholders," said John Coffee, a Columbia University law professor.
Although the unusual arrangement enables the company to raise money to help it survive the brutal housing downturn, the deal is likely to hurt shareholders, at least temporarily, by depressing the price of Standard Pacific's already beleaguered stock. The shares tumbled $1.05, or 13%, to $7.05 on the news as well as on the company's announcement that it would stop paying dividends to shareholders. The stock is down 74% this year.
"Given the negative sentiment toward home builders, it's more difficult for them right now to raise money," said Matthew Wilcox, an analyst at KDP Investment Advisors Inc., a bond research firm in Montpelier, Vt. "And this is probably about as good a situation as Standard Pacific could get to raise additional capital."
Other housing stocks also fell Monday, sending a Standard & Poor's index of builder stocks down 5.2%.
Standard Pacific executives couldn't be reached for comment.
It's not unusual for investors who buy convertible bonds to simultaneously sell the company's stock in a so-called short sale.
A short sale is a wager that a stock price will fall. Investors borrow shares, usually from a brokerage, and immediately sell them, hoping that they can give back the shares by buying the stock later at a lower price.
Investors in convertible bonds often sell the issuer's stock short to cut the risk of owning the bonds. If the company's financial condition worsens, depressing the value of both the stock and the bonds, the investors limit their losses on bonds with profits from betting against the stock.
On the other hand, if the stock price rises, the investors can convert their bonds into stock at a favorable price. Their profit on the conversion, however, is at least partly offset by a loss on the short sale.
