# Conversion ratio

The conversion ratio is the number of common shares obtained when a conversion is made from preference shares or a convertible security.

The conversion ratio is the number of common shares obtained when a conversion is made from preference shares or a convertible security. In short, the higher the security, the higher the number of common shares exchanged. The conversion ratio is calculated when the preference shares or convertible security are issued and has an impact on the conversion price of the equity.

## What is Conversion Ratio?

It specifies the number of common shares an investor receives for each convertible security when the conversion option is exercised. The conversion ratio is crucial for investors to determine the potential value of their convertible securities and when it might be beneficial to convert.

A higher conversion ratio generally makes the convertible security more attractive to investors, as they receive more shares upon conversion.

## How to Calculate Conversion Ratio?

Thus, the conversion ratio is calculated by dividing the par value of the convertible security by the conversion price of equity. Here is the formula:

• Conversion Ratio = Par Value of Convertible Bond/Conversion Price of Equity

For preference shares, the conversion ratio is generally set as 1:1 when issued. However, the ratio can also be determined by the price of the preferred shares over the price of common shares.

## Conversion Ratio – Impact on Convertible Bond Value

The conversion ratio significantly impacts convertible bonds’ value by influencing their potential upside and downside protection.

• Conversion Value – A higher conversion ratio means investors receive more shares upon conversion, increasing the bond’s value if the stock price rises
• Conversion Premium – A higher conversion ratio can reduce the conversion premium, making the bond more attractive as the stock price rises.
• Valuation Dynamics – If the stock price is low, the bond behaves more like a traditional fixed-income security, with its value primarily determined by interest rates rather than stock price movements.

The conversion ratio is crucial in determining convertible bonds‘ value, risk, and potential returns. It affects the bond’s attractiveness to investors and the issuer’s cost of capital, making it a key consideration in the design and investment in convertible securities.

## Risks of Low Conversion Ratio

A low conversion ratio in convertible bonds can present several risks for investors:

• Limited upside potential and Higher conversion premium
• Reduced sensitivity to stock price movements
• Delayed breakeven point
• Lower flexibility for investors
• Increased interest rate sensitivity
• Reduced downside protection
• Higher likelihood of forced conversion

These risks show the importance of carefully evaluating the conversion ratio when considering investments in convertible bonds. Investors should consider these factors against the potential benefits, such as the fixed income component and the possibility of equity participation, to make informed investment decisions.

## Strategies to manage a low conversion Ratio

Companies can employ several strategies to manage a low conversion ratio in convertible bonds to balance investor appeal and financial stability.

### Proven Strategies to deal Low conversion Ratio

Here are some key strategies companies use to manage and improve a low conversion ratio:

Strategy Definition
• By reducing the conversion price, companies can make the conversion option more attractive to investors.
• Enhancing bond features
• By Improving Coupon rate
• Issuing convertible Bonds with step -up features
• This will help to increase the conversion ratios at predetermined intervals.
• Offering Incentive for early conversion
• Premiums for early conversion can motivate investors to convert their bonds sooner rather than later.
• Offering Bonus shares to bondholders who convert within a specific timeframe can also increase the conversion rate.
• Improving company performance and stock price
• Operational Improvements
• Positive Announcements