Question

How does issuing convertible debt impact a company’s net debt amount

Answer 1

Convertible debts (like bonds, debentures, etc) are issued in a term that at maturity either the face values of debts are paid off or converted into securities under the specific condition. Issue of such debts affects in balance sheet as below:

1) Cash: It increases cash, since there is incoming of cash. This is reflected as current asset.

2) Issue expenses: All the issue-related expenses are reflected here and it should be kept under current asset. The whole amount is amortized over the tenure of the debt, which makes the head as nil at the end.

3) Liability: Issuing debt increases liability. The debt payable account features as face value of debt; and premium account reflects the amount of premium collected. Therefore, net debt would increase.

4) Stockholders’ equity: If the debt is converted to stock at maturity, the amount of common stock would be increased by the par-value conversion, and “paid-in capital in excess of par” would be increased by the premium conversion.