![]() ![]() ![]() In its recent regulator’s column, SGX sets out several disclosure requirements expected of listed companies intending to raise financing through the issuance of convertibles with a “floating” conversion price. The “death spiral” could also be tempered by setting a “floor”, or minimum conversion price. Further, for companies with low liquidity, the relevant risks associated with “death spiral” convertibles may be less acute. Even for companies with relatively healthy profiles, the increasing challenge of gaining access to capital can mean that issuing such convertibles, which are arguably more enticing to investors due to the protection they offer against price fluctuations, becomes discussion-worthy. For cash-strapped companies, convertibles with a “floating” conversion price may sometimes be the fastest way of raising funds, or even be the only viable source of financing. Why Issue Convertibles with a “floating” Conversion Price?ĭespite the risks associated with “death spiral” convertibles, there are several strategic factors a company may take into account when considering whether to issue such convertibles. Additionally, companies normally have to bear significant upfront fees for the structuring of such convertibles, and may also incur huge break fees for any termination of the convertible agreement. For one, the continual erosion of the share price due to repeated rounds of conversion and share sale may accentuate the company’s difficulty in obtaining other forms of financing or carrying out further fund-raising. There are several risk factors a company should consider when contemplating the issuance of “death spiral” convertibles. Thus, such convertibles are known as “death spiral” convertibles. The influx of new shares dilutes the share price, which then gets further eroded with each round of conversion and share sale by the subscriber. ![]() Where there is a sustained decline in the market price of the company’s shares, it can become appealing to the subscriber to keep “exercising” his convertibles and selling the shares thereby received to lock in a profit. Consequently, the subscriber is essentially insulated from any decrease in the market price of the shares – any decrease in market price causes a corresponding decrease in the conversion price which results in an increase in the number of shares that the subscriber will obtain upon conversion. Unlike a typical convertible instrument, the conversion price of such convertibles is pegged to, and is almost always lower than, the prevailing market price of the shares at the time of conversion. However, there exists a type of convertible in which the conversion price is not fixed, and is instead, “floating”. As such, subscribers will probably be inclined to “exercise” the convertible when the market price of the shares exceeds the conversion price as this raises the underlying value of the convertible. It is relatively common for the conversion price to be paid to be fixed throughout the term of the convertible. Over the term of the convertible, subscribers may earn interest and can be entitled to “exercise” the convertible in accordance with its terms, thereby converting all, or a portion of it, into ordinary shares. Companies can typically raise relatively large amounts of financing at the outset since subscribers will pay a principal amount upfront for the convertibles. In response to the situation, the Singapore Exchange (“SGX”) has released an article to highlight the risks of such convertible instruments, as well as the disclosure requirements expected of a listed company intending to employ such method of financing.ĭue to their hybrid nature, convertible instruments are an attractive form of financing and investment for companies and investors, respectively. Focus on “death spiral” convertibles – which are essentially convertibles without a fixed conversion price – sharpened recently after a bondholder triggered unusual volume movements in the shares of LionGold and Magnus Energy by converting its bonds into shares below market price and selling huge quantities of these converted shares thereafter. ![]()
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