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Investing in convertible bonds

Invesdor offers two convertible bond products for investors. They differ from more common bonds and equity instruments: read more and familiarize yourself with convertible bonds here.

Please note: if you represent a company and are looking for information on convertible bonds, you can also visit our convertible bond page aimed for companies.

 

What is a convertible bond?

Convertible bonds are hybrid securities that combine features of a regular bond (such as interest payments) with the option of converting the bond into shares of the issuing company at a later date.The bond's terms detail how the bonds can be converted, including the number of shares received or the discount share price given at conversion, situations when conversion can take place, events that trigger automated conversion, etc. 

 

Invesdor's convertible bonds: Classic and Bridge

Invesdor offers the Classic Convertible Bond for mature companies and the Bridge Convertible Bond for growth companies. Details and features of an offered convertible bond can differ from those presented here: always familiarize yourself carefully with the relevant investment materials before making an investment decision.

Classic Convertible Bond
  • The issuing company has to be a mature, established business
  • Tenure of the bond is 2-5 years
  • The bondholder can convert the bonds into the issuing company's shares during any qualified share round within the bond's lifetime
  • If the bondholder does not convert the bonds during any qualified share round and no automatic conversion scenario takes place, the bondholder can hold onto the bond through its lifetime and receive the principal payment upon the bond's maturity
Bridge Convertible Bond
  • Issuing company should be a growth company with a strong growth prospect, looking for external funding
  • Tenure of the bond is 1-2 years
  • Bondholder does not have the option to hold onto the bond through its lifetime and receive the principal payment upon the bond's maturity; automatic conversion happens in all scenarios

Issuing, investing and converting

Convertible bonds are issued by the target company and investors can acquire and receive them, becoming bondholders. In the beginning, the convertible bonds operate much like traditional bonds. They have a tenure and an interest rate according to which the company makes interest payments to bondholders.

The Bridge Convertible: conversion scenarios

The Bridge Convertible is converted automatically on its maturity, or if the issuing company:

- holds its next public or private share offering (also referred to as the next qualified share round),
lists on an exchange (incl. technical listing with no share issue),
- 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.

The Bridge Convertible Bond cannot be converted outside the events mentioned above. In all the Bridge Convertible's conversion scenarios, an individual investor's bonds are converted in full.

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The Classic Convertible: conversion scenarios

The Classic Convertible is automatically converted if the issuing company:

- lists on an exchange (incl. technical listing with no share issue),
- 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.

The Classic Convertible can also be converted during the bond's lifetime by the bondholder:

- during any public or private share offering of the issuing company (i.e. the qualified share rounds).

Unlike with the Bridge Convertible, however, the bondholder is not required to convert during the qualified share rounds.

The Classic Convertible Bond cannot be converted outside the events mentioned above. In all the conversion scenarios, an individual investor's bonds are converted in full: no partial conversion is possible.

If the bond has not been converted by its maturity date, the issuing company pays the bondholder any unpaid accrued interest and the original investment, also known as the principal payment.

 

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Conversion mechanisms

The Classic and Bridge Convertible can be converted into shares by two mechanisms, discount on the share price or a pre-determined number of shares. The issuing company sets in the bond's terms which mechanism will be applied.

Mechanism I: Discount on the share price

The issuing company can give a discount on the share price that the bondholder will receive when their bonds are converted (for example a 25% discount on the share price at conversion). 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.

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 bond when they are converted (for example, each bond is converted into 10 shares).

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Pre-payment option

The issuing company also has the option to pay back the convertible bond in the middle of the bond's tenure.

In this case, the issuing company pays investors any accrued unpaid interest, the principal payment, and a penalty payment determined in the bond's terms. Pre-payment is possible both with the Classic and the Bridge Convertible.

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Risks related to convertible bonds

It is possible the company that issued the convertible bond becomes insolvent, i.e. unable to meet its financial obligations, or goes bankrupt during the course of the bond’s lifetime. In such cases, the investor has the risk of losing some or all of their invested capital.

The convertible bonds do not have any collateral. The bonds are illiquid because they do not have any secondary market.

The risks described above apply to both the Classic Convertible and the Bridge Convertible. 

 

General and company-specific risks should be included in all investment materials. Always familiarize yourself carefully with the relevant investment materials before making an investment decision.