Using a Convertible Bond's Conversion Price to Assess Dilution and Repayment Risk
Treat the conversion price as a contractual term rather than a price target, and combine unconverted principal, put rights, and conversion periods to assess dilution and cash repayment risk.
The conversion price is the contractual price used to convert bond principal into shares. It is neither a fair value for the company nor a guaranteed return for the bondholder. It must be considered alongside remaining principal to calculate the potential number of new shares.
Unconverted principal matters more than the original issue amount
In a simple structure, the potential share count is calculated by dividing the remaining convertible principal by the current conversion price. Do not add principal that has already been converted or repaid. This is why the initial figures in the issuance decision disclosure must be linked to the latest quarterly notes and conversion exercise disclosures. If there are multiple bond series, divide each series' balance by its own conversion price before adding the results, since these may differ. For foreign-currency bonds or bonds with a separate conversion ratio, also apply the contract's currency and exchange terms.
Consider conversion and repayment together
Even if the share price exceeds the conversion price, not all bonds necessarily convert immediately. The exercise period, holder decisions, and adjustment clauses all matter. Conversely, when there is little incentive to convert, the issuer may still face a cash repayment obligation. Check not only maturity but also the earliest date on which investors can demand early redemption and the applicable rate. Rather than concluding that financing is cheap simply because the coupon is low, examine the maturity redemption amount, option terms, and issuance-related costs separately.
Connect a simple dilution table to the financial statements
Assuming all CBs convert is a tool for examining capital structure sensitivity, rather than a definitive forecast of the future. Conversion can reduce related debt obligations and change interest-related profit or loss, so an analysis that only increases the EPS denominator is incomplete. Accounting classification as liabilities, equity, or derivatives can vary with contract terms, so do not assume principal equals the carrying amount on the statement of financial position. Update the remaining potential share count when disclosures announce conversion price adjustments, acquisitions before maturity, or resales. It is better to group subsequent disclosures by bond series than to retain only the original issuance announcement. When a company issues bonds several times in the same year, similarly titled documents are easy to confuse, so also record maturity and payment dates as identifiers.
Worked example
Hypothetical example: With unconverted principal of KRW 3 billion and a current conversion price of KRW 6,000, the potential share count is 500,000. Added to 4.5 million existing common shares, this gives 5 million shares, so potential new shares represent 10% of the post-conversion total. If KRW 1.2 billion of that principal has been repaid and extinguished, the balance falls to KRW 1.8 billion and potential shares fall to 300,000. Continuing to use the initial 500,000 would overstate dilution by 200,000 shares.
What to check
- Check the unconverted principal and latest conversion price for each series.
- Record both the conversion period and early redemption dates.
- Reflect redemptions, conversions, and resales without double-counting.
- Do not confuse potential share count with the accounting carrying amount of the liability.
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.