Conversion ratio

The conversion ratio is the number of shares a holder receives for each convertible bond, or for each security giving access to capital, when it exercises its right. The issue agreement sets the initial ratio. The resulting conversion price, equal to the bond’s nominal value divided by the ratio, is compared with the share price or value to measure the conversion premium. The law protects holders against dilution. If the company issues new securities with preferential subscription rights, distributes reserves or premiums, or creates preference shares that change the allocation of profits, it takes protective measures, among them adjusting the conversion terms (article L. 228-99 of the French Commercial Code). The same article requires an adjustment when the company buys back its own shares above the market price. In the event of a capital reduction due to losses, the holders’ rights are reduced as if they had converted before the reduction (article L. 228-98). For an unlisted company, the issue agreement organises the adjustment. In a restructuring, the ratio for converting claims into shares determines the share of the capital delivered to creditors and the dilution of existing shareholders. For the borrower, the negotiation covers the initial ratio, the adjustment cases, the conversion period and the treatment of the bonds in a change of control.

A mid-sized company issues 300,000 convertible bonds with a nominal value of €100, or €30m. The ratio is two shares per bond. The conversion price comes to €50 per share. If all holders convert, they receive 600,000 new shares.

• The initial ratio and the resulting conversion price.
• The capital transactions that trigger an adjustment (article L. 228-99).
• The period during which holders convert.
• The treatment of conversion in a change of control.