Listed companies in financial difficulty are increasingly issuing convertible bonds in order to meet their financing needs. Belgium’s Financial Services and Markets Authority (FSMA) warns shareholders of such companies of the major risk such issuances entail for them.
A convertible bond offers the holder the right to convert the bond into shares. The conversion occurs at a conversion price set in advance. Usually, the conversion price will be higher than the market price of the issuing company at the time the convertible bond is issued.
However, the conversion price is in some cases lower than the market price at the time of conversion. It is in that case that this type of financing entails significant risks for shareholders. The conversion into shares then often results in significant dilution. Moreover, it can also create strong downward pressure on the share price.
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