Convertible bond

Take it apart and a convertible is a straight bond plus a call option on the issuer's own equity, sold to the bondholder and paid for out of the coupon. That is the whole instrument, and every question about it follows from that decomposition. The issuer is not getting cheap debt; it is getting ordinary debt and has sold an option to fund the difference.

The attraction to an issuer is real all the same. The coupon is materially below straight debt, the shares are effectively being sold at a premium to today's price rather than at a discount, and a company that cannot carry more leverage or cannot place equity at an acceptable price will often find a convertible is the only route open. The cost is that the option gets more expensive to have sold as the shares rise, so the better the company performs the worse the instrument looks in hindsight.

Under IFRS a convertible issued by the company is a compound instrument and is split at issue: the liability component is the present value of the coupons and principal discounted at the rate the issuer would have paid on equivalent non convertible debt, and the equity component is the residual proceeds. The liability accretes back to par over the life, so the income statement charge sits close to the straight debt cost rather than the cash coupon. US GAAP now generally keeps most convertibles as a single liability without separating the conversion feature, so US reported interest sits nearer the cash coupon. Same instrument, different income statements.

Know the buyer base, because it explains why deals appear and vanish. Some convertibles are held outright by credit and multi asset funds. A large part of the market is bought by convertible arbitrage funds that take the bond, short the right quantity of shares against it and are left holding volatility rather than a view on the company. That makes issuance sensitive to stock borrow costs, fund leverage and listed volatility, none of which is about the issuer's credit at all.