What is a convertible bond?
A convertible bond is a special form of bond that can or must be converted into shares of the company at a later point in time – depending on the contract terms. It combines fixed interest with potential equity participation.
Features of the convertible bond
Fixed interest
Regular interest payments during the term – as with a classic bond
Conversion right
Can or must be converted into shares of the company depending on the contract terms
Discount on conversion
On conversion, a discount on the current share price is usually offered
Distinction from the classic bond
The convertible bond shares some characteristics with the classic bond – but goes a decisive step further thanks to the conversion right.
Bond (classic)
Fixed or variable interest rate
Repayment at the end of the term
No participation in the company
Investors remain creditors
Convertible bond
Fixed interest during the term
Option or obligation to convert into shares
On conversion: participation in the company's success
On conversion: usually a discount on the share price
Return opportunities
Interest payments
Annually or semi-annually during the term
Optional capital appreciation
On conversion into shares
Discount on the share price
Favourable entry price on conversion
Structural classification
The convertible bond is a hybrid financing instrument that combines characteristics of debt capital (interest, term) with elements of equity (conversion right, participation). It is therefore classified as mezzanine capital.
Term
Limited, from 3 years
Type of capital
Mezzanine capital
Advantages
For investors
Regular and predictable interest payments during the term
On conversion: subsequent participation in the company's success
Favourable entry into an equity stake thanks to the discount
A combination of security (interest) and growth potential (share)
For issuers
Fast and flexible capital raising
Initially no giving up of company shares and voting rights
Predictable cost structure and flexible design possible
A good addition to a healthy financing mix
Risks
Risk of capital loss
If the company's value is low at the time of conversion, losses may occur. Conversion into shares is no guarantee of an increase in value.
Interest and repayment risk
Interest payments and repayment depend on the company's economic situation. In difficult times, there is a risk that no interest and no repayment will be made.
Risk of total loss
There is a risk of total loss, especially if the convertible bond is structured as subordinated. In the event of insolvency, subordinated claims generally receive no quota.
Risk warning
Acquiring this investment involves significant risks – up to total loss. Inform yourself carefully before investing and seek professional advice.
Invest in convertible bonds now
Discover current investment opportunities on CONDA Capital Market and benefit from the combination of interest and conversion potential.