Convertible bonds as a new source of complementary financing

What are convertible bonds? What types of convertible bonds are there? What are their benefits? At Gentile Law, specialists in business advice to companies, we explain everything you need to know in the following article about convertible bonds as a new source of financing.

What is a convertible bond?

What is a convertible bond issue as a new source of supplementary financing? Convertible bonds are a type of financial instrument issued in order to obtain financing for a company in exchange for potentially acquiring shares of that company.

We can define the convertible bonds as “bonds that grant the holder the option to convert the bond into shares of the issuing company at a predetermined rate and time”. These bonds offer the possibility of obtaining a higher return if the company succeeds and its value increases.

In recent years, convertible obligations have become relevant among companies that intend, in the medium term, to be listed on the stock exchange.

Why are convertible bonds important as a financial model?

Do you know that convertible bonds have gained prominence in Spain in recent years? What are the reasons why convertible bonds as a new source of financing are gaining importance? Among the main reasons are the high level of interest rates in traditional financing methods, the economic crisis of 2008 and the conflict in Ukraine. All of these have led investors to look for investment alternatives that offer a more attractive return.

Additionally, the COVID-19 pandemic made the Spanish Government to issue the ICO loans (Instituto de Crédito Oficial) to help the businesses affected, however these loans find themselves in an environment of high leverage which has led many companies to seek new forms of financing.

Further, the regulatory framework in Spain has evolved to facilitate the issuance of convertible bonds. Article 414 of the “Ley de Sociedades de Capital”, provides that corporations are authorized to issue bonds convertible into shares, subject to the general meeting determining the bases and modalities of the conversion and the relevant agreements among it of the corresponding capital increase.

What are the different types of convertible bonds?

What are the different types of convertible bonds? From Gentile Law, specialists in advising companies to obtain financing or investment strategies, we develop below the different types of convertible bonds. Thus, there are different types of convertible bonds, but the two main types of convertible bonds are traditional convertible bonds and mandatory convertible bonds.

a) Traditional convertible bonds

What are traditional convertible bonds as a source of financing? This type of bond give the investor the option to convert the bond into a predetermined number of shares of the issuing company at a predetermined price. In this case, the investor has the option to convert the bond or keep it until due date to receive the principal and interest payments.

(b) Mandatory convertible bonds

What are mandatory convertible bonds as a source of financing? On the other hand, mandatory convertible bonds require the investor to convert the bond into shares at a predetermined conversion price and date, which is typically before the due date of the bond. These bonds offer a lower interest rate but can provide a higher potential upside if the company’s share price rises.

In conclusion, convertible bonds offer several benefits to both investors and issuing companies in Spain. Investors can participate in the potential upside of a company’s stock price while receiving fixed income payments. For issuing companies, convertible bonds offer a lower cost of capital than traditional equity financing, while also providing a means to potentially raise additional capital if the bonds are converted into shares.

Do you want to know more about convertible bonds and their benefits as a new financing model? At Gentile Law, experts in commercial law, we advise companies in order to find new financing strategies.

Marta Batalla Eguidazu 

martabatalla@gentile.law

+34 91 435 45 19