The Flight Center Travel Group Ltd (ASX: FLT) The stock price has been on an erratic rise lately.
As of this writing, shares of the travel retail giant are changing hands at $ 20.28, down 6.33% from yesterday’s close.
Flight Center shares are on the move today after the company managed to price an overnight convertible debt issue.
What was announced?
Flight Center said it has successfully issued an offer of $ 400 million of senior unsecured convertible debt maturing in 2028.
Convertible notes (or bonds, as they are also called) will pay a coupon of 1.625% per annum, paid semi-annually.
This means that bondholders will receive two payments at an interest rate of 0.8125% on their principal per year.
Flight Center intends to use the net proceeds – approximately $ 393 million – to repay existing debt and take advantage of the current ultra-low rates on fixed-rate debt financing to help fund its vision for growth in l ‘to come up.
Part of the debt repayment is allocated to the Bank of England Covid-19 Corporate Financing Facility.
This facility was granted to the company last year and expires in March 2022.
What is a convertible bond?
A note or bond is a type of debt instrument issued by a company to investors in order to raise funds.
When executives are faced with financing decisions to grow the business or stay solvent, they typically have three choices: use on-balance sheet cash, issue more or new stock, or go into debt.
Bonds and corporate notes are just one way for investors to lend money to a company by purchasing the bonds. They then receive the interest and their money in full when the debt comes due in 7 years.
Issuers must have a high credit rating and have sufficient operating cash flow to service debt obligations as they fall due.
Convertible Notes are a special type of bond that has a special option built into its fine print.
It offers investors the option of “converting” their debt into shares if Flight Center’s share price reaches a certain level.
With this particular issue, the conversion price is $ 27.30 per share. At this point, bondholders will have the option – but not the obligation – to obtain Flight Center shares at that price.
What does this mean for the Flight Center share price?
Usually, all parties involved are convertible debt enthusiasts.
For businesses, it offers a lower cost financing solution, as investors will accept a lower interest rate so they can convert their bonds into stocks later.
Businesses also love convertible debt because when bonds are converted, the debt is written off from the balance sheet.
For investors, convertible notes are a very inexpensive way to raise equity, while providing some hedge against downside risk.
If Flight Center shares do not perform well, investors do not have to convert and they will still earn a 1.625% return and get their full capital back.
This equates to a gross yield of $ 2,985 at the tenor. However, if the stock price takes off, investors can convert at a ratio of 1: 27.50, which means if the stock price reaches $ 40, they can buy the stock at a discount of $ 31. %.
Unlike fixed income securities, the upside potential of stocks is unlimited, which means the gross return is infinite (in theory).
However, the conversion may dilute the holdings of other shareholders, as more individual shares are issued.
Flight Center Share Price Snapshot
Flight Center’s stock price has gained 27% this year to date and 47% in the past 12 months.
This is well ahead of the 19% gain in the S & P / ASX 200 Index (ASX: XJO) over 12 months.