Thursday, January 4, 2024

Today we want to pull on a thread mentioned in our last blog post about corporate debt, where a Barron’s article had cited Calcbench research and noted that “smaller companies are more likely to issue convertible debt” as a way to avoid higher interest expenses.

Well, convertible debt seems to be our first financial fad of 2024, since the Financial Times also just ran an article about how “U.S. companies have been piling into the market for convertible bonds as they search for ways to keep their interest costs down.”

So today we offer a refresher course on what companies disclose about convertible debt that they issue, and how you can research such disclosures on Calcbench.

Convertible debt is a bond or some similar note that can be swapped for company shares when the company’s stock price hits an agreed-upon level. Typically this debt carries a lower interest rate than standard debt, so it’s a way for companies raising debt to keep their interest expense low. That feature can be mighty attractive these days, as so many companies are refinancing low-interest rate loans issued in the 2010s at today’s much higher rates. 

OK, enough of the abstract stuff. How do you find the gritty details in Calcbench? 

As usual, one good place to start is the Multi-Company Page. Here you can find amounts of convertible debt disclosed by one or more companies that you follow; simply identify the peer group you want to research and type “convertible debt” into our Standard Metrics field. 

We pulled up convertible debt disclosed by non-financial companies with annual revenue of at least $100 million, then sorted from largest amount to smallest. The result is Figure 1, below.

As you can see, many of the largest issuers of convertible debt tend to be tech companies (and often life sciences companies too) that need lots of cash to fund high-growth expansions. 

An Example of Convertible Debt Details

We randomly selected Akamai Technologies ($AKAM), which reported $2.28 billion in convertible debt at the end of 2022, and used our Interactive Disclosure tool to research where that $2.28 billion figure came from. Digging into the Debt footnote disclosure from Akamai’s 2022 10-K report, we found that Akamai issued two tranches of convertible debt in recent years.

First was $1.15 billion of convertible senior notes issued in 2018 and due in 2025. The notes have an interest rate of 0.125 percent (wow), and each $1,000 of principal can be converted into 10.515 shares of Akamai, which is equivalent to a conversion price of roughly $95.10 per share. 

Now we get to the important part. Under what circumstances can debt holders convert their notes into Akamai shares at that $95.10 conversion price? Because if those circumstances come to pass and the debt holders exercise their conversion rights, that could dilute the value of shares owned by others. 

That’s something a financial analyst should want to know. If you own shares in Company A and it issues lots of convertible debt, you want to know the conditions upon which debt holders can convert the debt into equity — and then build models and alerts to track those circumstances, so a dilution event won’t catch you by surprise.

Thankfully, the footnote disclosures describe those conversion situations in detail. Let’s just excerpt straight from the 10-K:

At their option, holders may convert their 2025 Notes prior to the close of business on the business day immediately preceding January 1, 2025, only under the following circumstances: During any calendar quarter commencing after the calendar quarter ended June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; During the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day. On or after January 1, 2025, holders may convert all or any portion of their 2025 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.

We should add that Akamai issued another $1.15 billion in convertible notes in 2019, payable in 2027 and carrying an interest rate of 0.375 percent. Each $1,000 of principal for those notes can be converted into 8.607 shares, which is roughly $116.18 per share. Akamai’s footnotes then list the various circumstances where holders of this debt can convert their holdings into shares. 

For the record, Akamai’s share price in May 2018 (when the first round of convertible debt was issued) was roughly $76 per share. In August 2019 (when the second round was issued) the share price was around $87 per share. 

The question for debt buyers at the time (2018 and 2019) was whether they believed Akamai shares would trade higher than the conversion prices ($95 and $116, respectively) by the time 2025 and 2027 roll around. If so, then maybe it’s worth putting up with those ultra-low interest rate payments in exchange for a great conversion price in another few years. 

As of this week, Akamai shares were around $115. 

Go forth and research

Of course, many more companies carry convertible debt too, with a wide range of conversion prices and scenarios. We only picked Akamai as one example to show you the research that’s possible. 

There’s lots more out there! As always, Calcbench has the data.

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