Componenta's convertible bond is not particularly expensive

Translation: Original comment published in Finnish on 5/21/2024 at 8:29 am EEST.

Componenta announced yesterday that it has entered into a three-year 3 MUSD credit facility with the US company MPL, which includes a right to convert the bond into Componenta shares. In our opinion, the terms of the loan are reasonable and even when fully converted, the monetary dilation effect of the debenture arrangement is minimal. 

Dollar loan with conversion right

Componenta announced yesterday that it has reached an agreement with the US company MPL (no further information on the company in the release) for a 3.0 MUSD (2.76 MEUR) convertible bond arrangement, providing funding over 30 months. During this period, Componenta can draw down loans in installments of 0.75 MUSD with a maturity of 3 years. The purpose of the loan is not specified.

The other main terms of the facility are:

• The conversion right starts 18 months after the issue of the convertible bond required for conversion;
• The conversion price is 91.5% of the weighted average share price for the five trading days following the date on which the conversion right is exercised;
• The loan carries a coupon of 4.0% p.a;
• Componenta will pay a total of approximately EUR 100,000 in fees for the arrangement;
• Componenta has the right to redeem the convertible bonds at any time during the term by paying only the principal and accrued interest.

Overall, the terms are very reasonable

Since the conversion right is by definition "in the money", i.e., it has a cash value throughout its term, it will probably be exercised near the end of the term, unless Componenta makes an early redemption. If the loan were to be fully drawn and the conversion option fully exercised, the dilution at the current share price would be quite significant at 13.5%. On the other hand, the "value dilution" at the current share price would be only 1.0%, which is very reasonable for existing shareholders. Taking into account Componenta's redemption right and the fact that the 4.0% coupon on the loan is lower than the assumption used in our projections for the average interest rate on Componenta's debt (5.0-5.5% in 2025-2026), we believe that the terms of the loan are very reasonable for existing shareholders.