"Happy Meal" Bonds

Cash strapped companies who would typically find a bond issue problematic are turning to "Happy Meal" bonds. With a Happy Meal bond issue, the company issues convertible bonds and simultaneously lends the bond purchaser shares of stock. The bond purchaser will typically short sell the stock. In case you aren't familiar with a short sale, an investor sells borrowed stock today and later buys the stock back and repays the borrowed shares. Therefore, a short sales results in a profit when the stock price drops. Happy Meal bonds are typically purchased by hedge funds. So far, 19 of 24 companies who issued Happy Meal bonds have experienced a stock price decline in the 200 days after the bonds issue, with an average price drop of 53 percent. Proponents of Happy Meal bonds argue that the type of company that is forced to raise capital with a Happy Meal issue is more likely to experience financial difficulty.