What is a potential risk for issuers when dealing with convertibles?

The potential risk for issuers when dealing with convertibles is primarily related to the dilution of ownership structure that can occur when these securities are converted into shares. Convertible securities, such as convertible bonds or convertible preferred stock, give holders the right to convert their holdings into a predetermined number of shares of the issuing company’s stock.

When convertibles are exercised, new shares are created, and if a significant number of convertibles are converted, this additional issuance can dilute the existing shareholders’ ownership percentage. This dilution can have several implications, including potentially reducing the value of existing shares and altering control dynamics within the company.

This risk is particularly important in growth companies or those with limited equity supply, as it could affect shareholder sentiment and lead to a decrease in stock price. Issuers need to carefully manage the terms of convertible offerings to mitigate potential negative impacts on their existing shareholders while still providing attractive financing options.