How do issuers determine the terms and conditions of convertible bonds, including conversion price and ratio?

Issuers determine the terms and conditions of convertible bonds, including the conversion price and ratio, through a careful evaluation process that takes into account various factors related to the issuer's financial situation, market conditions, and investor preferences. The goal is to strike a balance between providing attractive terms for investors and meeting the issuer's financing needs. Here's how issuers typically determine these key convertible bond terms:

1. Financial Objectives:

• Issuers start by assessing their financing objectives and the purpose of the convertible bond issuance. They consider whether the goal is to raise capital for specific projects, refinance existing debt, or pursue other corporate initiatives.

2. Market Conditions:

• Issuers take into account current market conditions, including interest rates, equity market trends, and investor sentiment. These conditions can influence the attractiveness of convertible bonds as a financing option.

3. Stock Price and Volatility:

• The issuer's current stock price and historical price volatility play a crucial role in determining the conversion price. A higher conversion price may be set if the stock is trading at a premium, while a lower price may be chosen if the stock price is lower.

4. Premium Over Market Price:

• The conversion premium, which is the amount by which the conversion price exceeds the current market price of the issuer's stock, is carefully considered. Issuers aim to strike a balance to make conversion attractive to bondholders while not diluting existing shareholders excessively.

5. Conversion Ratio:

• The conversion ratio represents the number of shares an investor receives upon conversion of each bond. It is determined by dividing the bond's par or face value by the conversion price. Issuers typically choose a conversion ratio that aligns with their goals and the desired equity dilution level.

6. Equity Dilution Concerns:

• Issuers must assess the potential dilution of existing shareholders when convertible bonds are converted into common shares. They consider the impact on the company's ownership structure and earnings per share (EPS).

7. Interest Rate and Coupon Rate:

• The coupon rate on the convertible bond, which represents the fixed interest payment to bondholders, is established based on market interest rates and the issuer's creditworthiness. A higher coupon rate may make the bonds more attractive to investors.

8. Call Provisions:

• Issuers may include call provisions that allow them to redeem the convertible bonds under certain conditions. These provisions can affect the timing and terms of the conversion.

9. Investor Feedback:

• Issuers may solicit feedback from potential investors and underwriters during the structuring process. This feedback can help fine-tune the terms to meet investor preferences and market conditions.

10. Legal and Regulatory Considerations:

• Issuers must ensure that the terms and conditions of convertible bonds comply with legal and regulatory requirements in the jurisdictions where they are offered.

11. Due Diligence and Financial Modeling:

• Issuers often engage in financial modeling and due diligence to assess different scenarios and their potential impact on the company's capital structure and financial performance.

12. Underwriter Assistance:

• Issuers may work with investment banks or underwriters who provide guidance on structuring the convertible bond offering based on their market expertise and investor feedback.

Ultimately, the determination of convertible bond terms is a complex process that involves careful consideration of various financial, market, and strategic factors. The goal is to design a convertible bond offering that meets the issuer's financing needs while attracting investors and aligning with the company's long-term financial goals.