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After various stops and starts, Vonage has finally found someone to loan them the money to refinance their debt - they must do this by December or go belly up. Ike Elliott, who follows Vonage more carefully than I do, has a nice writeup on the financing. To put it bluntly, it is very, very expensive money. When someone raises debt at a floating rate of 15% with this many restrictive financial covenants, it generally means the bank has them by the balls and this case is no different.

But Ike had one unresolved item in his writeup, which relates to the anti-dilution features in the $90M convertible debt that is part of this deal, and I think I can answer it. Here is the quote from Vonage’s 8-K:

The Conversion Price will be subject to full-ratchet anti-dilution provisions for the first six months after the closing date and customary weighted average anti-dilution provisions thereafter.

Basically, the lender (Silver Point) gets protection against any further dilution in the most aggressive means available for the first 6 months, and by merely aggressive means thereafter. If Vonage issues shares (or converts with a strike price) below their conversion price ($1.65-$2 depending on conditions), Silver Point’s converts automatically reprice to the lowest price of any of those shares sold - even if only 5 shares were issued at the lower price. Here is the wikipedia article on full-ratchet anti-dilution.

After 6 months they use the more common weighted average anti-dilution provisions, which means their conversion price drops depending on the number of shares issued as well as the lower price itself - this is less punitive, I believe Global Crossing had this sort of arrangement on part of its debt to STT in their darkest post-BK days.

It goes almost without saying that Silver Point is covering its ass with just about everything it can on this deal, and Vonage couldn’t say no.  I have seen nastier financing terms in the VoIP industry, but only at VoIP Inc during their epic journey to Davey Jones locker.