What Are the Effects of Issuing Convertible Bonds and Bonds with Warrants?
[Asia Economy Reporter Ji-hwan Park] It is commonly perceived that issuing convertible bonds or bonds with warrants has a negative impact on shareholders.
Generally, this is true. A company that can easily borrow money would not issue such equity-linked bonds that could dilute the management's shareholding.
However, issuing convertible bonds or bonds with warrants is not always bad. Let's examine the effects of issuing these bonds. First, both convertible bonds and bonds with warrants increase the number of shares issued by the company. Along with the increase in shares, the cash inflow to the company also increases.
Convertible bonds refer to corporate bonds that investors can redeem with the issuing company's shares instead of the principal. Issuing convertible bonds reduces interest-bearing debt by the amount converted. In other words, the debt is replaced with equity capital. As a result, from the company's perspective, convertible bonds reduce interest-bearing debt and annual interest expenses.
Bonds with warrants refer to corporate bonds that carry the right to subscribe to new shares of the issuing company along with the repayment of principal. Bonds with warrants also increase the issuing company's cash assets by the amount exercised. The company’s assets increase with the incoming cash, and it earns interest income by utilizing those assets.
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There is also a possibility of diluting shareholder value. In particular, attention should be paid to the refixing clause. From a shareholder's perspective, if the stock price falls, the potential to gain profit decreases, posing a risk. For this reason, companies often include a refixing clause that recalculates the conversion price or exercise price linked to the declining stock price. In this case, while the amount of interest-bearing debt reduced or the cash inflow remains the same, the number of shares issued increases, which can negatively affect the value per share.
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