Please note: if you're an investor looking for information on convertible bonds, you can also visit our convertible bond page aimed for investors.

 

What is a convertible bond?

Convertible bonds are hybrid securities that have features of a regular bond (such as interest payments) while giving the bondholder the option to own shares of the issuing company at a later date. The bond contains terms at which is converted it to shares of the issuing company, including the number of shares it can be converted for and the conversion mechanism.  

Invesdor's convertible bond products come in two options: Classic Convertible Bond for mature businesses and Bridge Convertible Bond for growth companies. Below we have listed some requirements for companies interested in issuing convertible bonds via our platform as well as guidelines on which cases each bond is aimed for.

Classic Convertible Bond

  • The issuing company has to be a mature, established business
  • Company has a steady cashflow and can be reasonably sure to be able to pay regular interest and final principle payment of the bond for the investors who do not convert their bonds
  • Company is looking for a long-term loan but is also looking to reduce their interest expenses compared to a bank loan
  • Company plans for a future equity issue and wants to measure interest for it

Bridge Convertible Bond

  • The issuing company is a startup or growth company with a strong growth prospect, looking for external funding
  • The company has strong lead investors (e.g. VCs) supporting this funding route
  • Company is planning for a future equity issue but the current market situation is not favourable for equity funding
  • Company has internal or external factors that they believe could lead to potential value increase in the near future
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How does it work, exactly?

The convertible bond starts out much like a more common bond product: the issuing company pays interest to the bondholders according to the bond's terms. The bond can, however, be converted into the shares of the issuing company.

When are the bonds converted?

The Classic Convertible Bond can be converted during the bond's lifetime by the bondholder whenever the issuing company has any private or public share offering (also referred to as a "qualified share round").

The bondholder also has the option not to convert and hold on to the Classic Convertible Bond - in this case, they will continue to receive interest payments from the issuing company according to the bond's interest rate. If the bondholder does not convert their bonds and no automatic conversion event (see below) takes place within the bond's lifetime, the bond matures at the end of its lifetime. At this point, the issuing company pays the bondholder any unpaid accrued interest and the original investment, also known as the principal payment.

The Bridge Convertible Bond is automatically converted (also known as "required conversion") into the issuing company's shares during the next qualified share round of the issuing company that takes place within the bond's lifetime. If there is no qualified share round during the bond's lifetime, the bond is automatically converted on its maturity date.

Both the Classic and the Bridge Convertible are automatically converted if the issuing company:

  • lists on an exchange
  • merges with or is acquired by another company
  • goes bankrupt
  • enters into liquidation, or
  • if any shareholder obtains a right to redeem all the shares of the issuing company.

What are the conversion mechanisms?

The Classic and Bridge Convertible can be converted into shares in two mechanisms. Either conversion mechanism is possible with either of the convertible bonds: the issuing company sets the conversion mechanism that will be applied in the bond's terms. An individual investor's bonds are always converted in full: partial conversion is not possible in either the Classic or the Bridge Convertible. 

Mechanism I: Discount on the share price

The issuing company can give a discount on the share price that the bondholder will receive when the bonds are converted. For example: the bond’s terms say that at conversion, the bondholder receives a 25% discount on the share price. When the bonds are converted, either by choice of the bondholder or through required conversion, the bondholder receives shares at a discounted price for the value of their original investment. Let's take an example:

The bondholder invested €900 in the company's convertible bonds, the discount they receive at conversion is 25%, and the non-discounted share price is €40. This means they would receive the shares at a price of €40 - 25% = €30. When their original investment of €900 is converted into shares, they receive €900 / €30 = 30 shares. Investors not eligible for the discount would have paid 30 x €40 = €1,200 for the same number of shares.

The bond's terms will include a share price that is used to calculate the discounted share price for any potential scenario where there is no qualified share round to determine the share price (e.g. if the Bridge Convertible reaches maturity with no qualified share round taking place during the bond's lifetime).

Mechanism II: Pre-determined number of shares

Another conversion mechanism the issuing company can apply is that the bondholder receives a pre-determined number of shares for each converted bond. For example: the bond’s terms say that each bond is converted into 8 shares and the bondholder has 15 bonds.

The bonds are converted, either by choice of the bondholder (Classic Convertible) or through the required conversion feature (Classic and Bridge Convertible). The bondholder receives 15 x 8 = 120 shares. 

Can the convertible bond be pre-paid?

Both the Classic and the Bridge Convertible Bond can be paid back to bondholders by the issuing company in the middle of the bond's tenure. In this case, the company will pay investors the principal payment, any accrued unpaid interest, and a penalty payment detailed in the bond's terms. After these payments have been made, the convertible bond has run its course and there are no more outstanding payments related to it. 

 

Here are visualizations explaining the basic mechanisms of the two convertible bond products.

Classic Convertible Bond

Classic Convertible - flowchart visualization

 

Bridge Convertible Bond

Bridge Convertible - flowchart visualization

 

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