"Convertible securities are hybrid bonds and stocks that have a prearranged conversion factor into common stock, but pay an interest coupon to the holder until conversion is exercised. They have been in existence since the mid-1800s, when investors demanded the stability of bonds in order to take the risk on future equity stakes in a new transportation invention called the . Nowadays, companies often turn to convertible securities for large capital raises so their equity capitalization tables can avoid dilution."
"The investment was structured as convertible preferred stock with a 6% dividend and warrants to buy Bank of America common stock at approximately $7.14 per share. Buffett exercised the warrants to purchase common stock in 2017. At the time of conversion, the value of the common shares was much higher than the $7.14 exercise price, turning the investment into a large profit. Berkshire thus acquired a substantial stake in BoA common stock."
"More recently, Coinbase announced in August that it was raising $2 billion via $1 billion in convertible notes with a 2029 maturity and $1billion convertible notes maturing in 2032. Conversion to be in common stock, cash, or a combination of both."
Convertible securities combine features of bonds and stocks, offering an interest coupon until holders convert into common equity at a prearranged rate. They originated in the mid-1800s when investors sought bond-like stability to accept future equity stakes in emerging transportation ventures. Issuers use convertibles to raise large amounts of capital while postponing or reducing immediate equity dilution by choosing a later conversion date to allow funds to enhance enterprise value and lift share prices. High-profile examples include Berkshire Hathaway's 2011 convertible preferred investment in Bank of America, which converted profitably, and Coinbase's announced convertible note offerings with 2029 and 2032 maturities.
Read at 24/7 Wall St.
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