Issuing Pre-IPO
Convertible Bonds

Our specialists are also proud to offer convertible bonds to our clients. A convertible bond is identical to the bonds previously described. The only real difference is that within a convertible bond, bondholders may have their initial investment returned in equity, usually at a discounted rate.

The core takeaways of convertible bonds:

Conversion Ratios:

Also known as the conversion premium, this ratio is the determining factor in how many shares of stock a bond can be exchanged for. For example, a bond at £10,000 in value could be converted into 450 shares, if the conversion ratio was 45:1. 

This could be done with a premium, as an investor may also have to potentially pay extra (the price of common stock at issuance plus a predetermined percentage above that). However often, for smaller cap companies who perhaps are less sure of their value, this stock will be offered at a discount to encourage more investment within the business, and bring more cashflow.

For example, a three-year, £100,000 bond could become £125,000 in equity (at the current market value) once the bond matures. This could also be advantageous to the bond issuer.

Why consider a convertible bond?

  1.  Can be useful for the bond issuer’s cash flow, to continue growing the business.
  2.  If a company plans on issuing shares anyway, for example as a start-up, this could fit within the strategy as a useful way for raising finance via equity without initially issuing equity.
  3.  Can create options that allow for flexibility in the bond terms, though this could be at a cost of a more variable interest rate.
  4.  The later equity can be offered equity at a discounted rate, from pre-negotiated terms of conversion, meaning it can be more attractive to an investor.
  5.  A company might be unsure of its valuation, and so by having an option for a convertible bond, this could bring in more cashflow, particularly for young companies.
  6.  Depending on the country of issuance, there can be great tax advantages, due to interest payments generally being tax-deductible – savings which aren’t possible in equity financing.
  7.  The issuing company is able to defer stock dilution into the short or medium term, allowing for the original directors to retain control and voting power over the company’s direction – rather than this being subsumed before a company has developed further.


Mandatory Convertibles:

Through option agreements, the bond issuer can have the opportunity to take this conversion, or not, so long as the initially agreed bond was a reversible convertible bond. If after the term of the bond, the issuer decides they do not wish for equity to be given (perhaps due to more investors being interested after growth) and so would pay back the initial £100,000. This would be advantageous to help raise more funds in the long term. 

However, mandatory convertibles can provide some investors with an obligation to convert their bonds into shares at maturity. Generally, these bonds come with two conversion prices; the first of which would delimit the price at which an investor receives the equivalent in shares, and the second limiting the price above the par value. 

This is usually done only in the case of a company being confident that its share price will rise before a specific date, and relinquishes a lot of flexibility both from investor and from bond issuer. Alongside this, the coupon yield for mandatory convertibles would generally be higher, due to the increased risk taken by investors.

Forced conversion of the bonds can be completed by the issuing company, and usually happens when the price of the stock is higher than the amount that the bond. This would allow a company to capitalise by using the capital appreciation of investors’ stock to meet its own convertible bond obligations. 

For example, Twitter’s issuance of a convertible bond in 2014, raising $1.8bn with a conversion rate of 12.8793 shares per $1,000. That year, the price of Twitter stock did not achieve more than $55 per share – a far cry from the $77.64 level that was implied by the issuance of the bond. You can find out more about Twitter’s issuance, mandatory convertibles and forced conversion here.

Traditional convertible bond options are available from the initial creation of the bond and are directly tailored to the collaborative strategy employed between ourselves and clients in fund-raising activities. 

Next Steps

If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.

The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.

We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.

Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.