Breakfast Talk with Crowe: Convertible Bonds

Convertible bonds have been commonly used by many businesses as a means of obtaining funds from investors/lenders.

Convertible bonds that offer equity settlement option instead of full cash redemption, allows investors to increase their returns through participation in equity interest, while the issuing company benefits from lower borrowing costs and cash outflows. This flexibility is considerably critical for businesses at the expansionary phase.

Convertible bonds with equity conversion feature may give rise to both liability and equity balances in the book of the issuer. If not properly thought through, entering into such financial instrument may affect your organisation’s financial position significantly.

This breakfast talk, in its fourth run of the year, gave participants a basic understanding of how generic convertible bonds work and relevant factors to be considered when valuing the instruments. It also covered the fundamental accounting treatment under current financial reporting framework. An illustration of how the fair value calculation of a convertible bond in its simplest form was presented to facilitate participants’ understanding. The talk also encouraged participants to share their experiences about practical issues from the perspectives of either the issuer or holder of the instrument.