These instruments represent a type of debt security that, by their terms, must be converted into equity shares of the issuing company at a predetermined date or upon the occurrence of a specific event. Unlike optional convertible debentures where the holder has the choice to convert, these instruments mandate conversion. For example, a company might issue debt that automatically transforms into common stock after five years, regardless of the investor’s preference. This is structured to occur irrespective of market conditions or the financial standing of the company at the time of conversion.
A significant advantage lies in their utility for companies seeking capital without immediately diluting existing equity. By initially issuing debt, the company can attract investors who might be wary of immediate equity investments, particularly in early-stage ventures. Furthermore, these securities can be strategically employed to improve the company’s balance sheet over time. Once converted, the company’s debt decreases while its equity base expands. Historically, these instruments have played a role in financing growth and restructuring balance sheets in various industries, including technology and infrastructure.
