Advantages of Issuing and Holding Convertibles

For tax and other purposes, equity funds are treated differently from debt funds. In many jurisdictions, there is a tax advantage associated with raising funds as debt compared to equity, while on other occasions there will be cost advantages associated with raising equity. For a start-up company, it can be advantageous to issue convertibles, as these provide debt finance that can later be converted to equity finance. This flexibility is an advantage for the borrower. 

A disadvantage of issuing convertibles is apparent when the company experiences a significant rise in its share price in this case, the interest cost may turn out to have been prohibitive and the company would have gained if it had issued shares directly. This, however, is known only in hindsight. The same occurs if there is a substantial drop in the share price after convertibles have been issued here, there is no incentive for bondholders to convert and the company is left with debt on its balance sheet until maturity, when it might have expected to have converted them to equity capital. 

For an investor, holding convertible bonds provides an ability to participate in the fortunes of the company without having to have a direct equity holding. The bondholder has a fixed coupon income stream, together with 

For any bond issues, investors consider the term sheet, essentially a shortened version of the prospectus or offering circular, which details the conditions under which the bond is issued. Investors would look for some or indeed all of the following terms in the offer prospectus, which are considered to be favorable from an investor viewpoint. A lack of these features—or their opposite— would be less favorable to investors  

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