Sources of finance: BA goes for the convertible bond

You won’t find this source of finance in any of the new A Level Business textbooks, though it is likely to be an increasingly popular option for quoted companies who want to raise substantial new financeo over the next year or two…

British Airways has announced that it is to raise £300m of new funding via a convertible bond issue, as part of a £600m refinancing.

What is a convertible bond?

In essence it is a specialist kind of loan, when the bond holder (loan provider) has the option to convert the bond (loan) into the shares of the company to which it has lent the money. Convertible bonds were a very popular method of new finance-raising back in the mid 1990’s and you can expect to see more of these as larger quoted businesses loom to take advantage of low interest rates to secure long-term funding.

Another way of looking at a convertible bond is a shares with a long term put option. The holder of convertible bond gets all the benefits of shares (except for dividends and voting rights before conversion), but they also get interest payments until conversion (more than making up for dividends). In addition, if the shares under-perform, they can choose to keep the bonds, taking the interest payments and, ultimately, having the bond repaid.