Hello everyone,
It seems like it is a must that the company will issue new shares when its convertible securities holders decide to convert (like, we don’t apply treasury stock method for these convertible securities when calculating diluted EPS whereas we do with stock options). And it is stated that, in the case of convertible preference shares, the company usually wants to prevent the decrease in share price by offering to buy back the converted shares.
So, I want to ask, why don’t they just buy shares from the market to redeem those convertible securities? Or is it true that it is not necessary that the company will issue new shares?
Thanks.
The company will issue new shares, yes. The current shareholders will be diluted a little. The attractiveness of a convertible security is that it can be converted at a pre-specified price, commonly a cheap one compared to market value of the stock.
A brief example: A company requires to issue some debt, but its credit score is relatively bad, so high interest cost for new debt is expected. The company can issue convertible debt [into common stock] in exchange for a lower interest cost. Obviously, an investor willing to buy that convertible debt security must see some good prospects about the business and also demand a convertible price below market price of common stock at the moment of issuance.
Hope this helps.