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Convertible and/or exchangeable bonds: an essential tool for flexible corporate financing in the capital markets
The success of a financial transaction often depends on the ability to execute it quickly and without the delays and costs typically associated with traditional conversion methods. Companies, therefore, require mechanisms that afford them the agility and responsiveness demanded by today’s competitive environment.
Among the instruments that enable companies to access various sources of financing at any given time—and secure the most favourable financial terms—are convertible and/or exchangeable bonds. These instruments offer significant advantages for both companies and investors.
They provide investors with the opportunity to convert their debt holdings into shares of the company, potentially yielding a higher return than traditional fixed-income instruments. For the company, they can strengthen the capital structure at a lower cost, as the coupon on such bonds is generally lower than that of plain-vanilla bonds or bank financing.
Authority to issue convertible and/or exchangeable bonds
Under the general legal framework for the issuance of convertible bonds, public limited companies (sociedades anónimas) may issue bonds convertible into shares provided that: (i) the general meeting approves the terms and conditions of the conversion and resolves to increase the share capital by the necessary amount; and (ii) at the time of convening the general meeting, the board of directors issues a report explaining the terms and conditions of the conversion, which must be accompanied, where required, by a separate report prepared by an independent statutory auditor, appointed by the Companies Registry. In order for this resolution to be valid, the general meeting must also delegate to the board of directors the power to exclude shareholders’ pre-emption rights.
This delegation allows the board—within applicable limits—to determine key aspects such as the amount, type of instrument (bonds, debentures, warrants, etc.), issue price, maturity, interest rate, and whether the securities will be admitted to trading.
Regulatory limits and requirements for the issuance of convertible and/or exchangeable bonds
Despite the considerable flexibility of these instruments, the legal framework imposes certain requirements:
Conversion Value: The board of directors, when exercising the powers delegated by the general meeting, may not determine a conversion value for the bonds that is below the nominal value of the shares, nor may convertible bonds be issued below their nominal value.
Issuance Amount: The share capital increases required to honour the conversion obligations must not, under any circumstances, exceed 50% of the company’s share capital at the time of authorisation.
Capital Contributions: The share capital increases must be made exclusively through cash contributions.
Timeframe: The share capital increases must be executed within five years from the date of the delegation resolution passed by the general meeting.
Exclusion of pre-emption rights
For the delegation to be effective and enforceable, it is also advisable to authorise the board to exclude shareholders’ pre-emption rights in accordance with Article 511 of the Spanish Companies Act.
Should the board decide to exclude pre-emption rights in any particular issue, it must produce a report justifying the measure on grounds of corporate interest. This report may, in turn, be subject to an independent auditor’s report—prepared by an auditor other than the company’s statutory auditor and appointed by the Companies Registry. Both reports, where applicable, must be made available to shareholders and disclosed at the first general meeting held after the capital increase is resolved.
Requirement for an independent expert’s report
One of the main drawbacks of this type of instrument is the need to obtain the aforementioned auditor’s report, which can result in high costs and procedural delays.
However, Law 5/2021 of 12 April introduced an exception for listed companies (including those whose shares are traded on multilateral trading facilities, such as BME Growth). In these cases, where the issue does not exceed 20% of the share capital, the company is exempt from obtaining the auditor’s report, thereby significantly reducing the cost and speeding up the process.
Therefore, although the law limits the issuance capacity to 50% of share capital, listed companies may, so long as they remain below the 20% threshold, rely on the board of directors’ delegated powers to obtain financing in a swift, simple, and efficient manner.
Ultimately, convertible and/or exchangeable bonds constitute a strategic financing tool, offering greater flexibility than traditional methods and enabling companies to raise equity efficiently. Their regulatory framework provides legal certainty for both issuers and investors, consolidating their role as a key mechanism within the capital markets.
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