Convertible Bonds: A Win-Win Financial Mechanism

Any organization, be it public or private, sometimes feels the need to raise money from the market. For such a scenario, several mechanisms have been devised over the years. One such mechanism is a financial bond. A bond is, in simple terms, an investment or a loan given to a borrower who has agreed to repay the amount at a later date. The bond paper acts as a security to the investor or lender. There are many types of financial bonds, one of which is a convertible bond. Convertible bonds are a type of corporate debt security that, apart from the regular loan-repayment option, can be converted to a predetermined number of equities or shares. 

Analyzing the growing preference of convertible bonds 

As mentioned earlier, convertible bonds allow for it to be converted into pre-decided number of shares. The ratio that determines the number of shares that will be allotted is known as conversion ratio or conversion premium. Convertible bonds, thus, offer hybrid security both in the form of interest payments or allotment of shares. Thus, convertible bonds offer some sort of default risk security against failure of interest payment. At the same time, companies and corporate houses can benefit as they get access to immediate capital without having to dilute the shares of the company. 

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Another important factor which has increased the popularity of convertible bonds is that various types of these bonds have emerged to suit the needs of different investors. For instance, vanilla convertible bonds are the most basic type which gives the investor the option to get interest payments or to convert to a fixed number of shares. On the other hand, mandatory convertible bonds make it compulsory for the investor to convert the bond into shares, when it reaches its maturity period. Contingent bonds are somewhat similar to mandatory bonds. However, instead of converting to shares upon maturity, the bond gets converted to shares when certain pre-determined triggers or contingencies are encountered. Some convertible bonds are also exchangeable which allow the investor to convert the bond into shares of a different company which is usually a subsidiary or affiliate of the bond-issuing company. Thus, there are multiple types of convertible bonds which provide flexibility to the investor and also give the company easy access to capital. 

Dynamics of the convertible bonds industry 

The fact that convertible bonds offer higher returns as compared to traditional investment-grade bonds has increased the demand for these bonds. This increase in demand is expected to help the global convertible bonds market flourish in the coming period. Moreover, increasing digital trade over exchange (ETF) will also boost the market. Another interesting feature of convertible bonds is that they have long term return potential with flexible exit options. This has made convertible bonds more appealing which might create numerous growth opportunities in the industry. 

Apart from these factors, actions taken by major companies of the industry are anticipated to create favorable conditions for the growth of the market. For instance, in July 2021, Sosei Group Corporation announced that it was issuing euro-yen denominated convertible bonds with a maturity period due 2026. The idea, as per the company’s statement, was to strengthen Sosei’s financial base. On the other hand, in April 2023, Mitsui, a Japanese conglomerate announced that it was acquiring convertible bonds issued by Alvotech, an Icelandic biotechnology company. This partnership is expected to help both the companies to expand their operations significantly. 

To summarize, these stakeholder actions, along with the increasing digital trade over exchange (ETF) is anticipated to augment the growth rate of the convertible bonds market.