What's going on?
Social network Twitter revealed last week that it’ll raise $1 billion by selling bonds, but not just any bonds… these ones will be “convertible”, meaning they could turn into Twitter shares at some point in the future.
What does this mean?
Convertible bonds are just like normal bonds – except they have the potential to become shares in the company that issues them. They can be attractive to investors because, as well as regular interest payments, they offer the opportunity to own the company’s stock if it performs well (since conversion is usually dependent on the stock price reaching a higher, predefined level). Companies offering convertible bonds typically benefit from paying lower interest rates than they would on traditional bonds (Twitter will pay just 0.25% on its new debt) and potentially diluting the value of their shares less than they would with traditional shares (since there’s no guarantee convertible bonds will convert to new shares).
Why should I care?
The bigger picture: Tech companies are enjoying high stock prices.
Stocks of US tech companies have had a strong run, hitting record-level highs last week as investors shrug off “tech bubble” worries. Some other tech companies, like Etsy and Zendesk, are also taking advantage of high share prices by issuing their own convertible bonds this year – and investors are gobbling them up. While the average interest rate overall on convertible bonds this year is 2.5%, tech companies are paying an average of just 1%.
For markets: Convertible bond buyers beware.
Investors in Twitter’s last convertible bonds (sold in 2014, raising a total of $1.8 billion) have been left wanting. Though Twitter’s stock has risen by 90% in the last six months, it’s still below the predefined price at which Twitter agreed to convert those bonds into shares in the company. Investors are still getting paid their interest and will likely get their principal (a.k.a. their original investment) back, but probably won’t get any Twitter stock.