Knight Capital saved but at the cost of existing shareholders

The news today that $400m is being raised by way of a Convertible Bond at a massive discount to Fridays close – $1.50 is bittersweet news for existing shareholders – it avoidsbankruptcy and total wipe out but dilutes them very extensively – they got from 100% owners to 30% and so control is given to the new shareholders. Still beggars can’t be choosers…

The terms are a 2% coupon whch looks low but really is a smokescreen for the likely immediate conversion. The buyers include the private equity goliath Blackstone and at last print they look to have generated a 100% return on equity in a few hours – an example of just how dear equity capital currently really iss…

If Knight’s action is insufficient to restore confidence in the firm from its counterparties then this premium will be eroded quickly. The good news, at least for Knight’s 1400 employees, is that they will have a job and live to fight for at least a few more days until the true fallout of last week’s mega trade blunder is understood.