Convertible bond

A convertible bond is a debt security that gives its holder the right to exchange it for shares in the issuing company, at a conversion ratio set in the terms of issue. Article L. 228-91 of the French Commercial Code (Code de commerce) allows joint stock companies to issue securities giving access to the share capital. Article L. 228-92 reserves the decision to the extraordinary general meeting, which decides on the report of the board of directors or the management board and on the special report of the statutory auditor. Shareholders have a preferential subscription right. Until it is converted, the bond remains a debt security: the commercial chamber of the Cour de cassation restated this in a ruling of 18 September 2024. For the company, the conversion option granted to the holder makes it possible to pay a lower coupon than on debt of the same rank without an option. In return, existing shareholders are diluted if the holders convert. In an unlisted company, the terms of issue tie conversion to a liquidity event, such as a sale or an IPO. They set the repayment terms, with a non-conversion premium where relevant, if that event does not occur before maturity. In a debt structure, the convertible bond ranks behind senior debt. The senior lenders control its payments through a subordination agreement.

An unlisted company issues €40m of five year convertible bonds, with a 3% coupon and a conversion price of €50 per share. If the holders convert, they receive 800,000 new shares. With 3,200,000 existing shares, they then hold 20% of the share capital.

• The conversion price and its adjustment clauses
• The maximum dilution for existing shareholders
• The ranking of the claim relative to senior debt
• The early redemption cases at the option of the issuer or of the holders
• The authorisation of the extraordinary general meeting and the preferential subscription right