Convertible bonds are a particular type of bonds. These are configured as intermediate figures that allow reimbursement through securities of another type but of equal value. The most common are bonds convertible into shares which have characteristics of both.
The bonds convertible into shares confer the right to reimbursement, with the related interest, of the capital lent to the company and the right to subscribe to shares, so-called conversion shares. The moment it was decided to convert the bonds, the holder would transform from a creditor to a shareholder of the company. The ratio underlying a convertible bond is twofold is:
- a loan to the company from the bondholder;
- an option agreement, having as its object the renewal of the loan relationship in the company.
Convertible bonds can be issued either with direct method, the bonds that have reached maturity are converted into shares of the issuing company; or with indirect method, the bonds that have reached maturity will be converted into shares of a third company.
Fundamental is the conversion ratio, i.e. the number necessary to obtain the conversion shares, and the convertibility period, a continuous period or with fixed deadlines. If a bondholder does not exercise the right to convert the bond upon maturity, he or she will be reimbursed the nominal value of the bond. Issuing this type of bond is a way in which the company avoids transmitting negative signals to the market, as it implies that it expects good corporate performance in the future and an increase in the share price. They exchange on the MOT.
For further information: "Convertible bonds and bonds cum warrants: what they are and how they work"
