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Hi John. Please help me with the following statements:
” A company will aim to issue convertible loan notes with the greatest possible conversion premium as this will mean that, for the amount of capital raised, on conversion, have to issue the lowest number of new ordinary shares”
I dont get this. I understand that conversion premium is the excess of the MV of convertible stock over the current share price(of the shares).
“When convertible loan notes are traded on stock market, its min. market price will be the price of straight debentures with the same coupon rate of interest. If the MV falls to this minimum it follows that the market attaches no value to the conversion rights?
If their is a high conversion premium, because investors think the shares will have a high value on the conversion date, then the debt can be issued at a high price.
If the debt is issued at a high price then they need to issue less debt to raise the amount needed.
If they issue less debt, then they will need to issue fewer shares on conversion.
With regard to the last stamens, yes – if the market value falls to the minimum it means that the investors are expecting to prefer taking cash to shares and therefore attach no value to the conversion rights.
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