What are some differences between debt-with-warrant financing and convertible debt?
Debt-with-warrants as a hybrid security are really two separate securities: the debt and warrants. The interest and principal of the debt security is still collectible regardless of whether the warrants are exercised. A convertible bond is a single security with a convertible feature. If a convertible bond is converted into stocks, the interest and principal of the bond are no longer collectible, because the bond is now terminated in lieu of the stocks.
Convertibles and debt-with-warrant as a form of financing differ in the following ways:
Warrants can be separated from the main security, while the conversion feature cannot be separated from the main security.
The exercise of warrants will result in issuance of new shares without extinguishing the main security, while a convertible by converting to common shares replaces the original security.
Warrants have shorter maturity than convertibles, and convertibles may have a call provision unlike warrants.
Convertibles have lower underwriting costs than debt-with-warrants.
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