Convertible bond dilution question
Trying to gain a fundamental understanding of low coupon convertibles, high conversion premiums and their impact on dilution. To some degree it seems premiums do enough to offset dilution according to an article in WSJ.com published back in May. this virtually free money? 2020 was record setting and 2021 is surpass old peaks.If shares don't perform thus, no conversion, and maturities require repayment, will companies often just issue more (given extremely low rates) to repay and rinse repeat to keep raising cheap capital?
WSJ article: https://www.wsj.com/articles/convertible-bond-sal…
Yes and no. It depends on overall market conditions and the current company’s credit rating etc. 2020 and 2021 were insane years for convertible pricing. Like you said, there were a ton of 0% coupon convertibles, up 50% strike. Companies took advantage of that because it’s virtually free money, and if the convertible is ever in the money then equity holders don’t care much about the tiny dilution in comparison.
If the market ever retracts and goes back to the typical 2.5% coupon and 30% premium, then convertibles won’t be as attractive for issuers. The main issuers in those environments are somewhat distressed companies and tech/healthcare startups. It’ll be interesting to see in 4-5 years when a f ton of convertibles mature and it’ll be expensive to roll it over into another convertible or issue entirely new convertible.
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