You make an excellent point rak.Agreed, the debt is not as risky as the equity in all situations, however lets think about the case where the BOD sell MNKD to ACME for $0.50 per share.

Let us look at the components firm value for MNKD assuming a sale to ACME for $0.50 per share.

$215MM senior convertible debt

$283MM note to interested third party

$100MM for 200MM shares

Total firm value: $598MM

So, ACME is willing to buy MNKD at a firm value of $598MM

Assuming the conversion did not happen the capital structure would be:

$215MM senior convertible debt

$283MM + $77MM = $ 360MM note to interested third party

169MM shares (200MM- 31.25MM)

ACME still values MNKD at $598MM.After accounting for the $575MM debt ($215MM + $360MM), there is only $23MM left for equity.So this values equity for $0.14 per share ($23MM / 169MM shares), which is $0.36 per share less than with the conversion.

Keep in mind that these calculation are back of the envelope, since firm value may not be the same under both scenarios, but it illustrates the point.

You are correct that if we assume MNKD is sold to ACME for a certain distressed valuations, as an investor I am better off with the conversion.

Now we have to think about the probability of each of the outcomes.

For equity to get a price that is more than $0 per share, the firm has to be valued at more than$498MM without the conversion, and more than $575MM with the conversion. If it is below $498MM, it does not matter if the conversion happened or not, equity gets zero.If the firm value is between $498MM and $995MM then the conversion was better for the existing shareholders.If the firm value is greater than $995MM, then the conversion is worse for existing shareholders.

In my opinion, in a couple of years, it is much more likely that the firm value will be either less than $498MM or more than $995MM.So, I conclude that the expected value to equity is lower with the conversion.