Convertible Securities
A popular way to offer investors enticing securities is via a “convertible security.” A convertible security is normally a bond or note or sometimes a preferred share or stock which will be ‘converted” at a later date to equity. Typically, the buyer of convertible securities can determine when they convert the securities to equity. In other scenarios the company can control when the debt is converted. Our team at PPM can assist with consultation, writing and drafting of a prospectus or offering memorandum for convertible securities. We can give you insight as to the most suitable offer to make. We help the issuing company with peace of mind by structuring a safe deal, yet simultaneously incenting investors for the issuance.
Who Issues Convertible Bonds or Convertible Notes
Many companies in the private placement market issue convertible debt. It is a solid method to raise capital in lieu of a public stock offering or having to obtain bank financing. In theory – and it always depends on who you are speaking to – issuing convertible debt is more attractive than “regular” debt (no conversion) and therefore companies that issue convertible notes or convertible bonds raise capital faster than those that issue debt without such sweeteners. Convertible securities generally convert to equity at a fixed rate into common shares or common stock. This may include caps and voting right provisions, dilution clauses and a host of other limitations.
Conversion Ratio Versus No Fluctuations
In some issuance of debt conversion securities, the terms may stipulate that the conversion is based on the market pricing which would then mandate just how much equity one should receive in the conversion. This is not the most popular way to issue convertible notes or bonds, but it is a common method. A company would issue such convertible notes, bonds or debentures in order to ensure the longevity of the company. For if market prices fluctuate or collapse, the company’s equity structure would crumble for those who are converting their securities to equity (in contrast to if the company grew dramatically, in which case the shock of conversion would be much less dramatic).
Such convertible debt with a conversion ratio is also referred to as a floorless conversion, toxic conversion, ratchet convertibles and even death spiral conversion, all not the most flattering of terms.
Convertible Bond and Note Risks
There are always risks in investing in securities in general and convertible securities are no different. If one is investing in convertible securities that are set to market ratios or pricing – which are subject to fluctuation – one must exercise caution. In addition to the conversion ratio risks an investor should take note of a company that issues a substantial number of shares (dilution issues or low pricing issues) and/or below market conversion pricing would have on the long term (and short term) impact on the company’s ability to raise additional capital. Like all good issuers, the company will write a prospectus. And like all good investors, they will read the prospectus to determine if the investment is the right move.
PPM
Our team at PPM assists companies worldwide with writing and consulting for convertible bonds, convertible notes, convertible debentures, and the gamut of convertible securities.
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