Covered Bonds
February 12, 2025
The term short selling is often seen in the news. This tactic is regularly used by well-known investors. They are also very public about the shares they have shorted. This prompts many retail investors to follow suit. While, it may be true that many funds and high net worth investors make a lot of money […]
The field of strategy is not an exact science. This is because strategies are made based on the assumptions that an individual or a group of people have about the future. It is for this reason that if different people undertake the activity of strategic financial management, they are likely to come up with different […]
Markets across the world can also be segregated based on the type of intermediary. Prima facie, it may appear that the type of intermediary is not of much consequence. However, over time, market participants have realized that the type of intermediaries has a profound effect on the liquidity, efficiency as well as transaction costs related […]
What Is Scrap? Scrap is the waste that arises while manufacturing goods. It may arise because the unit being manufactured has been irreparably damaged during production. Alternatively it can arise because too much direct material is being used for production. In either case, it signifies that there are problems with the manufacturing process that need […]
In the previous articles, we have already seen how the use of securitization has grown in sports. We also know that the increasing use of securitization is because of certain benefits that are provided by this method of raising capital. However, it is important to note that securitization is a part of structured finance. Structured […]
In the previous article, we studied the concept of convertible debt and some of the common terms which are used while discussing convertible debt. In this article, we will have a closer look at some of the advantages and disadvantages of using this form of debt.
Many companies continue to use convertible debt. This is because it provides several advantages over plain vanilla debt bonds. The advantages have been explained in detail in this article:
Later, by the time, investors have exercised the option to convert the debt to equity, the company would be at a higher stage of growth. As such, the valuation that the firm would realize using convertible debt is more than the valuation which the firm would realize in other scenarios. Hence, many companies look at convertible debentures as a form of obtaining delayed equity financing.
Every financial instrument has its own pros and cons and convertible debt is no exception either. Some of the common disadvantages associated with convertible debt have been mentioned below:
The end result would be a large number of shareholders. Hence, from the next year onwards, the profit will be divided between a larger pool of investors. Hence, each individual investor would earn a smaller earning per share. If companies issue excessive convertible debt, they could face backlash from existing shareholders who would obviously be opposed to the idea.
Since these firms generally have a higher risk compared to other firms, the debt that they issue also tends to have a higher risk as compared to other firms. Hence investors who put their money in fixed income securities must be aware that their money is not as safe in convertible bonds as it would be in other bonds.
Hence, it would be fair to say that convertible debt offers a lot of advantages to certain types of firms. The disadvantages can also be significant. However, if a company is able to plan ahead, then it may be able to mitigate some of the risks that result from convertible debt.
Your email address will not be published. Required fields are marked *