What factors influence the choice of conversion premium and coupon rate when structuring convertible bonds?

The choice of conversion premium and coupon rate when structuring convertible bonds is influenced by various factors, including the issuer's objectives, market conditions, investor demand, and the company's financial situation. Here are the key factors that drive the determination of these parameters:

1. Market Conditions:

• Current interest rates and prevailing market conditions significantly impact the coupon rate of convertible bonds. The issuer seeks to set a coupon rate that is competitive in the current interest rate environment to attract investors.

2. Cost of Capital:

• The issuer considers its cost of capital when determining the coupon rate. The coupon rate should be attractive enough to incentivize investors to purchase the bonds while not exceeding the company's cost of capital.

3. Credit Rating:

• The issuer's credit rating plays a crucial role in setting the coupon rate. A higher credit rating allows the issuer to offer lower coupon rates, reducing borrowing costs. Conversely, lower-rated issuers may need to offer higher coupon rates to attract investors.

4. Equity Dilution Tolerance:

• The issuer assesses its tolerance for equity dilution when setting the conversion premium. A higher conversion premium results in lower dilution upon conversion, which may be preferred by the issuer if it wants to protect existing shareholders' equity.

5. Equity Upside:

• Issuers may use the conversion premium to determine the level of equity upside offered to bondholders. A lower conversion premium provides investors with more significant potential for equity appreciation upon conversion.

6. Market Demand:

• Market demand for the convertible bonds influences both the coupon rate and conversion premium. If there is strong investor demand for the bonds, the issuer may be able to offer a lower coupon rate and a higher conversion premium.

7. Comparable Securities:

• Issuers may benchmark their convertible bond terms against similar securities issued by peer companies. This can help ensure that the terms are competitive and attractive to investors.

8. Company's Growth Prospects:

• Companies with strong growth prospects may offer lower coupon rates and higher conversion premiums to entice investors with the potential for significant equity upside.

9. Competitive Landscape:

• The competitive landscape in the convertible bond market plays a role in determining the terms. Issuers assess what other companies are offering to ensure their terms are competitive.

10. Maturity Date:- The maturity date of the convertible bonds can impact the coupon rate. Longer-dated bonds may offer higher coupon rates to compensate investors for tying up their capital for an extended period.

11. Industry Norms:- Industry norms and practices can influence the choice of coupon rate and conversion premium. Certain industries or sectors may have established norms for these parameters.

12. Investor Base:- The issuer's target investor base may also shape the terms. For example, if the issuer is targeting income-oriented investors, it may offer a higher coupon rate, while targeting growth-oriented investors may lead to a lower coupon rate and higher conversion premium.

Ultimately, the choice of conversion premium and coupon rate in convertible bond structuring involves striking a balance between the issuer's financing goals, investor appetite, and market conditions. Issuers may work with investment banks and financial advisors to determine the optimal terms that align with their specific objectives and circumstances.