Happy Meal deals are just one of the ways hedge funds extend credit to struggling companies. At least 24 companies have done 26 bond deals that used share-lending agreements since 2004, raising nearly $7 billion. Restrictions on short selling during the financial crisis slowed such transactions for a time, but five companies have done six deals since mid-2010, with the last one coming in January. Another solar-power company is currently registered to do one.
Which isn't popular with the companies' shareholders, though maybe it ought to be;
Mikhail Filimonov, founder of hedge fund Odyssey Investment Management, who bought [now bankrupt] Energy Conversion bonds and shorted its stock at a previous fund, says such company failures shouldn't be blamed on short sellers.
"If the company's business model is sound and the outlook is positive," he says, "eventually the short sellers will get squeezed and punished for the wrong bet."
Lawrence McDonald, a former Lehman Brothers convertible-bond trader, characterizes the deals as one of the few financing options available for some companies. "It's the last saloon where you can get a drink," he says.Short sales, as the WSJ story explains, happen when a pessimist borrows a company's stock from shareholders, and sells it hoping to be able to buy it back at a lower price in the future. So, these Happy Meal Deals are just cutting out the middle man; borrowing stock from the company itself.
And, if the stock rises in value, the hedge funds can convert their bonds--representing the money loaned to the company--into stock. A sort of double hedge.