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Fundraising with convertible bonds

Is your company looking for funding but the time is not ideal for an equity issue? A convertible bond is an instrument that can provide an alternative approach, both for small growth companies and more established businesses.

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.

Invesdor offers two convertible bond products: Classic Convertible Bond for mature businesses and Bridge Convertible Bond for growth companies. Below we have listed some requirements for companies and 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, a constant positive financial track record, 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

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 can also choose not to convert the 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, the bond matures at the end of its lifetime. The issuing company then pays the bondholder any unpaid accrued interest and the original investment.

The Bridge Convertible Bond is automatically converted 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.

 

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. An individual investor's bonds are always converted in full. 

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, a 25% discount.

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 converted bond. For example: the bond’s terms say that each bond is converted into 10 shares.

 

Pre-payment option

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.