September 17, 2014 by Thomas Mullooly

Last week Twitter raised $1.8 billion in a convertible bond issue. Over the last couple of years, many companies have issued convertible bonds as a way of raising capital. Why convertible bonds though? Tom and Brendan discuss during this weeks Mullooly Asset Management podcast.

In order to explain why companies have been utilizing convertible bonds to raise money, we first need to explain what a convertible bond is. Convertible bonds are interesting because theyre a combination of debt and equity. Investors purchase a bond that comes with the opportunity to convert it into the underlying companys stock at a later date. The date is normally set in advance along with a conversion price. These bonds typically offer a lower yield than other debt securities because of their tie to the underlying stocks price. This is also what has made covertible bonds popular in the last few years. Theyre often purchased by timid investors who would like to participate in the market, but dont want the risk of owning stock outright. They obtain limited downside (and upside) by owning the convertible bond instead.

So far in 2014, US-listed convertible bond sales have raised $35.1 billion!

Why would a company want to issue convertible bonds?

Two words: interest rates. The biggest reason companies prefer issuing convertible bonds has very much to do with the historically low interest rates were currently experiencing. They can achieve their goal, obtaining capital to grow their business, at super low rates. Like mentioned earlier, convertible bonds have lower yields than traditional corporate bonds. So they get to take the currently low interest rates and lower them even more by issuing convertible debt. Another advantage of selling convertible bonds is that the amount issued does not show up on the companys balance sheet as a debt. Interest payments, unlike dividend payments, are federally tax deductible.

Two recent and notable convertible bond issues have come from Apple and Twitter.

bonds.about.com/od/corporatebonds/a/Apple-Bonds-What-You-Need-To-Know.htm

www.forbes.com/sites/steveschaefer/2014/09/12/twitter-takes-advantage-of-soaring-stock-with-1-3b-convertible-debt-offering/

Hopefully this weeks podcast will leave you with a better understanding of convertible bonds and why a company might use them to raise money. We highly recommend listening to the podcast and, as always, get in touch with us if you have any questions!

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