Demystifying Modern Convertible Notes - April 2024 - Revised Edition

Latham & Watkins LLP
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Issuing convertible notes has long been an attractive capital-raising option for public companies. At its most basic essence, a convertible note is a debt instrument that pays interest and principal, but also carries the right to exchange the interest and principal cash streams into an equity interest, typically common stock, of the issuer. In that sense, a convertible note can be viewed as a debt instrument combined with a call option (a warrant) on the underlying common stock. However, this basic structure has evolved considerably, particularly within the past 20 years, to incorporate several new and sometimes relatively complex features to address changing regulatory and accounting frameworks and investment strategies. To a company contemplating a convertible note offering in the United States, many of these features may seem counterintuitive, and even puzzling. This primer aims to demystify the underlying financial and accounting principles and the mechanics that have developed to respond to those changing frameworks and strategies. With the right advisers to help navigate the potential pitfalls, many companies can effectively raise funds through convertible note offerings while reducing their overall cost of capital and, accordingly, increasing stockholder value.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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