Question 6.RQ.2: ‘Convertible loan notes are really a form of delayed equity....

Convertible loan notes are not necessarily a form of delayed equity. Although they give an investor the right to convert them into ordinary shares at a given future date, there is no obligation to convert. This will be done only if the market price of the shares at the conver-sion date exceeds the agreed conversion price. The conversion price is usually higher than the market price at the time the convertible loan notes are issued and so the market price of the shares will usually have to rise over time in order for the lender to exercise the option to convert. During a period of stagnant or falling market prices, the lender is unlikely to exercise the option and so no conversion will take place. Hence, it cannot be assumed that there is an automatic conversion from loan notes to ordinary (equity) share capital.