Convertibles - Financing and Investor Relations Instrument in Companies with Value-Oriented Management

By Michael Evers, Rheinische Fachhochschule Köln, University of Applied Sciences, Fachbereich Wirtschaft, Summer 2003

The thesis looks at the ties between two topic areas: the financing function of convertibles and the field of investor relations. The goal of this paper is to illustrate to the reader that convertible bonds, which in financial literature and in practice have been known only as a financing instrument up to now, can also be put to use in the field of investor relations.

Executive Summary

Structure

First of all, convertibles are introduced as a financing instrument in chapter 2. This examination focuses on the historical development of convertible bonds, their significance in the marketplace, their legal circumstances as well as their specific features.

Then chapter 3 is devoted to presenting the field of investor relations. This includes an explanation of the objectives of this field as well as a description of the target groups and instruments of investor relations.

Chapter 4 serves to illuminate the link between chapters 2 and 3. Based on two practical examples, the reasons for choosing convertibles as a financing instrument are explained. Subsequent to this, with respect to the configuration and characteristics of convertible bonds the author attempts to show what possibilities convertibles offer as an investor relations instrument and what courses of action can be recommended as a result.

The final section of this paper consists of a summary of the conclusions that were reached.

Results

• By integrating convertibles into their investor relations activities, companies can derive an additional positive benefit.
• Convertible bonds are particularly significant as a financing possibility during times of weak capital markets.
• The conversion right offers good prospects for both the issuer (low interest rate on borrowed capital, advantageous terms for share capital increase) and the investor (fixed interest rate, repayment right, possible equity participation).
• Since convertible bonds do not themselves entail any communicative elements, they must be tied into the existing investor relations concept.
• Convertible bonds are particularly well suited as an investor relations instrument for attracting potential investors who either have had no connection with the company to date or have shied away from directly investing in the company?s stock.
• For a company that employs convertibles as an investor relations instrument, the risks relate to the choice of the issue date as well as to the environmental influences during the life of the issue. Convertible bonds therefore should not be issued at a time when the price of the underlying stock is at historical highs, since this can make it difficult for the share price to exceed the higher conversion price.