Convertible Bond Conversion Prices and Equity Dilution

# Newly issued convertible bond conversion price typically higher or lower than current stock price?


# Newly issued convertible bond conversion price typically higher or lower than current stock price?












Reading this news about the valuation of airbnb makes me wonder.

https://www.reuters.com/article/us-airbnb-debt/airbnbs-new-1-billion-investment-comes-at-lower-valuation-sources-idUSKBN21P3IM

> Silver Lake and Sixth Street received warrants that can be exercised at an \$18 billion valuation, below the \$26 billion Airbnb was valued in early March in its internal valuation, one source said.

So, that means the real valuation of AirBnb is higher, or lower than 18billion?

Let's assume Airbnb is traded on public market, and the conversion price is \$18/share. Currently, Airbnb should typically be traded above or below \$18/share?

I assume below because if now AirBnb is at \$19, investor will just convert at \$18 and make \$1 immediately?

But when I research convertible bond, it seems like the company can "call the bond" at a certain price too. Then, typically, the "call price" (sorry if't the wrong terminology) should be a different price from the investors "exercise price"? Should that be higher or lower than the stock price?

To rephrase my question, if it's a public company issuing convertible bond, typically the conversion price should be higher than current stock price, right?

[EDIT] for clarify, this might not be not a convertible bond. But it surely looks like one. so I am just asking hypothetically, what would it actually value airbnb at.

Sorry for the basic question, just trying to understand how convertibles work..

## Answer by Lliane (score 1, accepted)

https://quant.stackexchange.com/a/53153

> I assume below because if now AirBnb is at 19, investor will just convert at 18 and make $1 immediately?

Wrong, that call option (the warrant part of the deal) has intrinsic value even if the current share price is above the strike. Else all investors would exercise their convertible bonds as soon as the spot goes above the strike. Maybe those investors paid 5 dollar per share for the warrants, so no point converting to get only 1 dollar back.

> To rephrase my question, if it's a public company issuing convertible bond, typically the conversion price should be higher than current stock price, right?

Typically the conversion price is above the current price, it could theoretically be below but it wouldn't make much economic sense and would make current equity investors very unhappy.

If you have a conversion price below the current price, your package product becomes more like equity, because the call option component becomes much bigger and the debt component smaller in proportion (you can see a typical CB as being 80% debt/20% equity at the time of issuance). You are going to massively dilute your current shareholders, and they will probably dislike that. If you want to raise equity capital, you are more likely to use a right issue or just sell equity directly.

Investors in CB typically want the safety of debt with a bit of upside in a good scenario, CBs with a strike below the current price have a delta that is getting close to 1 with the stock and are not attractive for many kinds of investors, usually leaving only arbitrageurs holding them.