Special Situations: Short Trade Idea in a Busted Preferred Equity

Unveiling the Complex Web of Growth, Debt, and Litigation Challenges Amidst Ambitious Expansion

Executive Summary:

I recently came across an interesting busted preferred equity. The underlying company here has high growth ambitions which have come at the expense of high leverage and negative FCF. Despite the negative FCF, the company continues to pay both preferred and common dividends.

I think the preferred stock holders are out to lunch as they comprise mainly retail investors who are attracted by a high absolute dividend yield. I think liquidity could quickly be put under pressure as the company has several material fixed obligations in the near-term and its founder are under serious investigation by federal/regulatory agencies.

Without access to capital markets, I think a dividend cut is possible which could catalyze a significant sell-off in the preferred stock. Despite these glaring risks, the borrow does not appear to be overly burdensome, especially given these potential near-term catalysts.

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