According to CNBC's David Faber, Knight Capital will live at least for another day and avoid bankruptcy. Instead, it will experience dilution which will make its equityholders almost wish the company was filing. Knight, via Jefferies, is about to stick its shareholders with a massive dilution following the issuance of a $400 million convert bond at a $1.50 conversion price, or more than 60% dilution from Friday's $4.05 closing price. This means the pro forma share count will soar from 90 million to 350 million upon conversion, which as David Faber says, will take place promptly by all members of the syndicate after 10 business days. In other words, KCG just issued stock at a ~63% discount to new money.
Knight Capital gets $400M from four firms through conv pref offering. Conversion price is $1.50 a share, but firm will be saved.— DAVID FABER (@DavidFaberCNBC) August 5, 2012
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Knight Capital Group has been saved with an infusion of $400 million in the form of a convertible preferred security that gives the buyers the right to buy Knight shares at $1.50, according to sources close to the deal.
The private-equity firm of General Atlantic (which owns the Getco market maker) along with Blackstone private equity, Omaha brokerage firm TD Ameritrade, and Stifel Nicolas will buy the $400 million preferred, which has a conversion price of $1.50 and will massively dilute the trading firm, but allow it to replenish its coffers and open for business on Monday.
The four buyers of the preferred will together own about 70 percent of the firm, which upon conversion of the preferred, will see its share count rise from a hundred million shares to roughly 350 million shares. The coupon on the preferred is 2 percent, but all the firms are expected to convert after 10 business days.
Jefferies led the offering and has been engaged with Knight since it suffered a $440 million trading loss on Wednesday.
This effectively means that the equity slice is for all intents and purposes wiped out and will be crammed down by a convert (technically upon conversion pari passu with the equity, but implicitly a 60%+ discount to market to stimulate new strategic investor interest), which itself may also be at risk, if Knight's action is insufficient to restore confidence in the firm from its counterparties. It also means that since the convert is unsecured, those who invest in it could face full write down on their investment shortly, which likely means the previously discussed TD Ameritrade and Getco.
But the good news, at least for Knight's 1400 employees, is that they will have a job for at least a few more days until the true fallout of last week's mega trade blunder is understood.
As for what happens next for KGC stock? It may well bounce following a sharp but brief short covering rally, only to be followed by an exodus as investors take the opportunity to cash out from a firm which has already indicated it will do anything to preserve its viability, including nearly complete dilution.