As the financial markets continue to perform relatively badly, biotechnology companies are increasingly turning to new sources of funding. But some financing methods being adopted, in particular so-called convertible issues, are regarded negatively by industry watchers because companies with low revenues run the risk of losing ownership if stock valuations fall too low. Convertibles have already played a part in destroying some companies—notably Scotia Holdings (Stirling, UK)—and analysts say more might be on the way if share prices keep falling.
Convertibles resemble ordinary bonds (fixed-term loans) in that the borrower pays annual interest at a pre-agreed (“coupon”) rate and undertakes to redeem the bonds later on, typically in five years. The difference is that, when holders of convertibles cash in their bonds, they have an option to take up shares in the issuing company instead of dollars. The prospect of owning equity can lure otherwise cautious investors. In addition, “Convertibles generally have smaller coupons than straight debt, thereby reducing [a company's] interest expense and helping their cash flow,” says William Harding of US investment advisers Morningstar. They also come with lower bankers' fees than equity financing.
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