How Much Does a Lower Conversion Price Increase Potential Shares?
Distinguish conversion price reset triggers, floors, and upward adjustment terms, then recalculate potential shares using remaining principal. Separate ex-rights adjustments from market price declines.
When a reset lowers the conversion price, the same unconverted principal can produce more shares. However, adjustment triggers and contract terms differ, so not every price adjustment should be interpreted as the same additional loss to existing shareholders caused by a market price decline.
Separate falling share prices from changes in share units
First determine whether the adjustment reflects a change in market price or a change in the rights structure, such as a stock split or bonus issue. A change in share units that halves the per-share price has a different economic meaning from reducing the conversion price amid a decline in business value. Align issued share counts before and after the adjustment on the same share basis to compare the effects. Predicting a new conversion price from the latest closing price alone, without examining contractual adjustment intervals and calculation criteria, is likely to produce errors.
The percentage price decline differs from the percentage share increase
Potential shares equal remaining principal divided by the conversion price, so the share count moves inversely to the price. A 20% decline in conversion price increases shares by 1/0.8-1=25%, rather than simply 20%. If some principal has been repaid or converted in the meantime, however, separate the price effect from the balance effect. Even if the disclosure provides the new number of shares available for conversion, independently dividing principal by price helps verify the units and calculation. Calculate each bond series separately and avoid counting the same new shares twice.
Consider contract terms and the timing of applicable rules together
Check the minimum adjustment floor, upward adjustment provisions, and exceptions according to the issue date and type of security. The Financial Services Commission's 2024 reforms addressed excessive downward adjustments and issuance and trading disclosure issues. These general explanations do not justify applying a single floor or adjustment interval to every CB. In the analysis note, separately record the initial issue price, current price, contractually confirmed boundaries, and next possible adjustment date. Approaching the floor does not guarantee a bottom in the share price or future conversion. After reading an adjustment disclosure, also update the date on the previous analysis table. To avoid mixing a current conversion price with an old principal balance, show the principal reference date and price effective date together in one row.
Worked example
Hypothetical example: Assume the conversion price on KRW 2.4 billion of principal falls from KRW 8,000 to KRW 6,000 while principal remains unchanged. Potential shares rise by 100,000, from 300,000 to 400,000. The price decline is 25%, while the potential share increase is approximately 33.33%. Full conversion alongside 3.6 million existing shares gives a total of 4 million shares, with potential new shares representing 10%. Check the contract for whether the adjustment is actually permitted and what limits apply.
What to check
- Distinguish adjustments for market price changes from changes in share units.
- Calculate quantities before and after adjustment using the latest remaining principal.
- Check contractual floors, upward adjustments, and adjustment intervals.
- Check the rules applicable at the original issue date and subsequent amendments.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.