Convertible Bond

Okay, there’s a joke about The Inquisition in here somewhere. Or maybe something about Cossacks and 17th century Russia. Or maybe a King Henry thing.

But yeah...all different kind of, uh...conversion.

Way more pedantically, a company might be having a hard time selling or issuing its bonds to Wall Street. In order for them to close the deal, with their stock trading today at 25 bucks a share, they might say, "well…these bonds are convertible into 20 shares of our stock." That is, a single thousand dollar unit of that bond would convert into 20 shares, which would then value the shares at 50 bucks, which would be sorta the over/under price at which bond holders would start to seriously look at converting.

Why would a company offer convertible bonds instead of just…ya know…bonds?

Well, if they were stuck paying 6% interest on just bonds, but really wanted to only pay 4%, they might get the interest rate discount by throwing in that equity kicker...in the bonds having the convertibility feature. Yes, they would suffer dilution at 50 bucks a share, but that price is double where the stock is today, so the company is probably thinking that it wouldn’t mind some dilution from these bonds being converted waaay up there.

And remember: the bonds pay the 4% interest along the way...until they are converted. The moment those bonds are converted into equity, the debt on the balance sheet of the company (and its obligation to pay that 4% a year interest) goes away fully.

They print 20 more shares for each bond converted, and yes, those shares may pay a dividend…but as far as the convertible bonds go, they are thereafter converted.

And saved. Hallelujah.