Convertible Bonds

Step 1: Conversion Price

Conversion Price = Reference Share Price × (1 + Conversion Premium)

Using the reference price of €40.00 and the 30.0% (0.300) premium:

Conversion Price = €40.00 × 1.300 = €52.00

The conversion price is the share price at which a bondholder is indifferent between holding the bond to maturity and swapping it for stock. Because it is struck 30% above where the shares trade today, the option is deliberately issued out of the money: the company is effectively selling equity forward at a price it cannot achieve in a follow-on offering today. That premium is the single most negotiated term in the whole structure, because it determines both how much stock the issuer eventually gives away and how attractive the paper looks to convertible arbitrage funds.

Step 2: Conversion Ratio

Conversion Ratio = Par per Bond / Conversion Price

Using the €100,000 denomination and the €52.00 conversion price:

Conversion Ratio = €100,000 / €52.00 = 1,923.08 shares per bond

The conversion ratio is fixed at pricing and does not move with the share price; it is the mechanical link between the bond and the equity. It is adjusted only for defined dilutive events such as stock splits, rights issues, or dividends above an agreed threshold, which is why convertible terms sheets contain long anti-dilution schedules. Analysts use the ratio to translate any share price into a bond price, and vice versa.

Step 3: Conversion Value (Parity)

Conversion Value (Parity) = Conversion Ratio × Current Share Price

Using the ratio of 1,923.08 shares and the current share price of €40.00:

Conversion Value = 1,923.08 × €40.00 = €76,923, or 76.9% of par

Parity is what the bond would be worth if it were converted into shares right now and the shares sold immediately. At issue it sits well below the €100,000 issue price, which is exactly what a 30% conversion premium is supposed to produce. A convertible trading close to parity is behaving like equity; one trading far above parity is behaving like a bond. Tracking the gap between price and parity over time is how convertible desks decide whether a name is still an equity story or has become a credit story.

Step 4: Straight Bond Floor (Investment Value)

Bond Floor = Coupon × [1 - (1 + y)^-n] / y + Par × (1 + y)^-n

Where: y = 6.00% straight-debt yield, n = 5 years, Coupon = 1.50% × €100,000 = €1,500 per year.

Using the 6.00% discount rate over five years, the annuity factor is [1 - 1.06^-5] / 0.06 = 4.2124 and the discount factor on the principal is 1.06^-5 = 0.7473:

Bond Floor = €6,319 + €74,726 = €81,044, or 81.0% of par

The bond floor, also called investment value, is what the instrument would be worth as a plain five-year bond if the conversion right were stripped away entirely. It is the level the convertible should not fall below as long as the issuer stays solvent, which is precisely why convertibles are described as having an asymmetric payoff: limited downside from the floor, unlimited upside from the option. The floor is not fixed, though — it moves inversely with the issuer's credit spread, so a credit deterioration removes the very protection investors bought.

Step 5: Implied Value of the Embedded Conversion Option

Embedded Option Value = Issue Price - Bond Floor

Using the €100,000 issue price and the €81,044 bond floor:

Embedded Option Value = €100,000 - €81,044 = €18,956, or 19.0% of par

This residual is what investors are implicitly paying for the embedded call option on MidCap Tech's shares. In practice a convertible desk would value that option independently with a binomial or Black-Scholes model using the stock's implied volatility, dividend yield and the issuer's credit spread, then compare the model value with the 19.0% the market is charging — a convertible that prices "cheap" to model value is the classic entry point for convertible arbitrage funds, who buy the bond and short the delta-equivalent number of shares. For the issuer, the same 19.0% is the honest answer to "what did this really cost us": it is equity value handed over in exchange for the low coupon computed next.

Step 6: Annual Cash Interest Saving versus Straight Debt

Pre-Tax Interest Saving = (Straight Debt Yield - Convertible Coupon) × Issue Size

Using the 6.00% straight-debt yield, the 1.50% convertible coupon and the €200.0m issue size:

Pre-Tax Interest Saving = (6.00% - 1.50%) × €200.0m = 4.50% × €200.0m = €9.0m per year

After-Tax Interest Saving = €9.0m × (1 - 0.250) = €6.75m per year

This is the coupon give-up investors accept in exchange for the equity upside, and it is the reason growth companies with weak current cash flow reach for convertibles: the instrument converts an expensive interest bill into a contingent equity claim. Over the five-year life the cumulative pre-tax saving is €45.0m, set against the €18,956 per bond — roughly €37.9m across the €200.0m issue — of option value given away. Note the after-tax figure is the one that matters for cash flow and coverage ratios, because interest is tax-deductible while the option cost is not a cash expense at all.

Step 7: Dilution on Full Conversion

New Shares on Conversion = Issue Size / Conversion Price

Using the €200.0m issue size and the €52.00 conversion price:

New Shares = €200,000,000 / €52.00 = 3,846,154 shares

Dilution = 3,846,154 / (100,000,000 + 3,846,154) = 3.70% of the enlarged share count

Full conversion happens only if the shares trade above €52.00, meaning the issuer gives away 3.70% of the company but only after the stock has appreciated at least 30%. Compare that with a follow-on equity offering today: raising the same €200.0m at €40.00 per share, typically after a placement discount, would create 5.0m new shares or more and dilute existing holders by around 4.8% immediately, with no upside condition attached. That contrast is the core of the issuer's rationale, and it is also why the accounting matters: under the if-converted method the 3.85m shares enter diluted EPS as soon as the bonds are dilutive, not only when conversion actually occurs.

Final Results

• Conversion Price: €52.00
• Conversion Ratio: 1,923.08 shares per bond
• Conversion Value (Parity) at Issue: €76,923 (76.9% of par)
• Bond Floor: €81,044 (81.0% of par)
• Embedded Option Value: €18,956 (19.0% of par)
• After-Tax Annual Interest Saving: €6.75m
• Dilution on Full Conversion: 3.70%

These outputs feed directly into the next two pieces of work an analyst would do on this issue: the equity bridge, where the convertible sits as debt until it converts and then moves into the share count, and the diluted EPS calculation, where the if-converted method adds back the after-tax coupon and layers in the 3.85m shares. They also set the benchmark for any refinancing decision later, because the issuer can compare the 19.0% option cost against what a straight bond or a follow-on placement would have cost instead.

Would you like to explore how the bond floor and the embedded option value move if the issuer's credit spread widens, or how a call feature with a soft-call trigger would change the investor's payoff?