Note: I wrote this for myself. Not you. This isn't investment advice. Updated 8/28/2024.
CareCloud Pref A is at $10. The preferred As collapsed from $27 to $5 after the owners realized that they didn't have change of control provisions. These are worth $25-$35. If they convert to common, pref holders are paying $1/share for $0.35 in earnings. If they don't convert, the discount is no longer warranted.
The company is currently breakeven, with $1.5M in interest/year and $15M in preferred dividends.1
Management struck a deal to lower preferred dividend of the As to 8.75% and add convertibility in exchange for adding a change of control provision.2
Management likely plans to convert all preferred shares to common, reducing preferred interest expense from $13MM/yr to $3MM/yr.
At current prices, preferred shareholders are paying $1/share for common stock that will earn about $0.35/share post-conversion due to a cost cutting program.3
Even if they don't convert the shares, the As will still be worth over $25 due to the dividend being twice covered.4
Putting it all together, I expect the company to make around $25MM in operating income from cost cutting and operations, and a conversion of As to common means $0.35/share in operating earnings.
You get that $0.35/share in earnings for the cost of $1/share ($10/share for pref A converted at a $2.50 stock price).
The security is trading at $10 and I think it is worth $25 in the case of non-conversion, as the dividend would be twice covered. Or worth $35 if they convert to shares. Some risks:
The cost-cutting program may not achieve the projected $20M in FCF, or may destroy the company long term.
Management owns no As, only commons, and may be hesitent to refinance the company or convert the A shares (diluting themselves)
The company itself has some enterprise value, but is not a cash flow machine. It is a software company with a ton of financing and aggressive management.
4.53MM pref A shares with 11% dividend yield, 1.48MM pref B with 8.75% dividend- both on $25 par means $2.75 and $2.19/share in dividends respectively.
Common stock is at $2.50/share, and par for preferred is $25. That means preferred shareholders will get 10 shares for every 1 pref they own. Each pref costs $10. So $10/10 = $1/share cost basis
The dividend burden will be $13MM/year, and the company will make $25MM/year in EBITDA. Almost 2x coverage but who's counting.