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31 Oct Exhausting Debt with Convertibility

When I read this WSJ article this morning, it made me realize that the length of my mortgage was nothing compared to the sovereign debt from war bonds purchased about 100 years ago. Rate changes have made the repayment of some very old UK debts a likely good deal for the government. In fact, it appears that said war bonds include some extremely early debt perhaps as old as some of the first government bond notes dating as far back as the 1700’s. The amounts are now paltry compared to current GDP and it’s interesting to note that the once 4% rate on the bonds has now been trumped, warranting a complete repayment of the debts. Debt can be a burden on many smaller businesses, but for those with the cash flows to cover the burden having access to credit can be a crucial tool in the arsenal for keeping a business afloat.

But what if the business wishes to liquidate debt, perhaps by converting it to equity? 

Not all debt is immediately convertible to stock, but when it is it can be an extremely powerful tool for helped to free-up cash flows. Taking a company public through non-traditional methods is a good way to begin the process of exhausting some of the debt and freeing up cash flows for reinvestment. While some equity is given up, the need for cash to help fuel more growth may be greater than some of the risks of being a public company.  Even when debt isn’t itself convertible, the capital raised in a public offering is often used to pay down debts or refinance them to more favorable terms.

Not Always a Good Deal 

Depending on who holds the debt and what type of convertibility it has, convertible debt in alternative public offerings or in a shell game, may not be a good deal for all involved. Sometimes the debt has convertibility that involves 2 for 1 (or even more) multiples that benefits the debt-holder, but is ultimately a bad deal for the company shareholders. Holders of convertible debt may want such warrants on their debt and in some instances may be willing to give a break on the rate if a public offering is imminent and they think a deal may allow them to obtain an even greater return.

There are nearly unlimited methods for structuring a deal well so it works for all parties involved, but there are a few simple ways that convertible debt could go very, very badly. Just be aware that all convertible debt options may not bode well in the favor of shareholders and be aware that some may be peddling a “too-good-to-be-true” deal that may not be the best option for the company.

If you’re a sovereign debt-holder like the U.K. and you can sell a hoard-load of bonds at 2.95%, that’s a good deal. I would stock-pile debt to reinvest it as convertible debt for others if I could get it that low, but alas I’m no sovereign government.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.