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The Blackberry logo on a office tower in Irvine, Calif., on Oct. 20, 2020.MIKE BLAKE/Reuters

A debt refinancing designed to provide BlackBerry Ltd. BB-T with some financial flexibility ultimately sent the company’s shares tumbling to their lowest level in 21 years, complicating the new chief executive’s plans to win back investors.

In November, BlackBerry, the former mobile-phone maker that has pivoted to cybersecurity and connected car software, announced a partial extension of some debt, with US$150-million worth of notes refinanced and given a maturity date of Feb. 14.

Because this debt was coming due, analysts and investors widely anticipated a new offering – the only unknown was what the terms would be. On Wednesday, BlackBerry announced the new convertible debt will mature in 2029, pay 3-per-cent interest annually, and allows noteholders to convert into shares at a 32.5-per-cent premium to the stock’s closing price at the time of the offering.

Investors who specialize in buying convertible debt ate the deal up, allowing BlackBerry to increase the offering size to US$175-million from US$160-million. Yet those who owned the company’s shares weren’t so pleased, and BlackBerry’s stock plummeted 18 per cent on Wednesday to close at $3.94 on the Toronto Stock Exchange, its lowest level since May, 2003.

Despite the extra breathing room provided by the new five-year maturity date, some investors balked at an interest rate that is almost double the 1.75 per cent BlackBerry paid on its last offering – and the new notes also have a conversion premium that is roughly half the 64.8-per-cent premium previous debt holders had to pay. That means it is easier for noteholders to convert their securities into stock, which dilutes existing shareholders.

BlackBerry’s new offering was also sold in the U.S., and American convertible debt deals can create sharp share-price swings because of a trading strategy used by hedge funds that specialize in these types of notes.

The strategy, known as a convertible hedge, involves buying convertible notes through a new offering while simultaneously shorting that company’s shares. When an investor shorts a stock, they borrow a company’s shares, sell them at current prices, then repurchase them at a later date to return them. The goal is to repurchase the shares at a lower price than the original sale and pocket the difference.

Because of this dynamic, hedge funds were likely putting downward pressure on BlackBerry’s shares. That pressure, combined with any selling by existing shareholders who didn’t like the deal’s terms, can cause a major tumble.

BlackBerry’s share price stabilized on Thursday, climbing 1.5 per cent to close at $4 in Toronto, but analysts aren’t expecting any major catalysts that will improve the company’s outlook in the immediate future. Despite trying to retool for more than a decade, the company is still struggling to find its footing and continues to lose money – which is one reason why equity investors are concerned about new debt that pays a higher interest rate.

“Investor visibility to the stabilization in BlackBerry’s revenue and path to sustained profitability is low,” RBC Dominion Securities analyst Paul Treiber wrote in a note to clients when the company reported earnings in December.

Late last year BlackBerry named a new CEO after long-time leader John Chen departed, with cybersecurity president John Giamatteo appointed as the new chief. Mr. Giamatteo previously served as president and chief revenue officer of Silicon Valley cybersecurity stalwart McAfee Corp. from 2013 through early 2020.

To help turn things around, BlackBerry announced last fall it would start to restructure by cutting costs in its cybersecurity division and back-office functions, with more cuts expected early this year. The company also has plans to split in two – one business for cybersecurity, which has struggled to grow in a highly competitive market, and another for what the company calls IoT, or Internet of Things, which includes the connected car software.

With a report from Sean Silcoff

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