Why cash-seeking companies should follow Trainline and look to convertible bonds as a fundraising lifeline

There’s a type of company that’s doing badly now but will see boom times again once we get through Covid. You know the ones — transport operators, pubs, some of the better retailers.  

Since last April, they’ve raised billions from their shareholders and banks to tide them over.

It’s happened across the developed world, but in the UK, we’ve been sluggish in what seems a really attractive way of doing it — convertible bonds.  

This is where, rather than simply create and sell new shares to raise funds, companies issue bonds which can convert to shares at a later date.

First launched in the 1880s to fund railway builders, they can benefit both investors and the company. Existing shareholders don’t see their stakes diluted (for now at least), while those buying the bonds get guaranteed interest plus the chance to own shares if the firm does well.

Trainline, 140 years on from those earlier rail innovators, today pulled off just such a deal. Ocado did, too, last year, but, unlike in the US and Europe, they’ve been few and far between. 

UK investors, it seems, are wary, perhaps bitten by losses run up on convertibles issued before the global financial crisis.

That’s a pity, because the terms available for decent companies with low debt can be fantastic, while investors get the chance to beat near-zero returns on gilts.

Trainline will pay only 1-1.5% interest on its £150 million, and the bonds only convert if its shares surge 45-50%. 

Terms like that show just how much of a scramble there is out there from investors for this stuff - even if those investors aren’t often Brits.  

They also serve as a sign of confidence in the company’s prospects. After all, investors are betting on a 50% share price leap.

And Trainline’s deal wasn’t the most generous by any means. Bankers say some European convertibles were done last year with a zero percent coupon, and a conversion rate trigger even higher than 50%.

Convertibles aren’t for every company. 

They tend to be easier for bigger businesses with the most  easily tradeable shares (liquidity, in the jargon). Having low debts at the outset is important, too - even though they’re potentially equity, they still have to be accounted for as debt on the balance sheet.