Summary: Afterpay issues zero-coupon convertible note; similar to Xero convertible note issued last year; March year 2026 maturity.
Convertible notes have been around for decades, if not centuries. Traditionally they have been used to raise capital by issuers in a manner which placates investors which otherwise might baulk at stumping up funds for what could been seen a risky proposition. Essentially, a convertible note is a bond stapled to a call option on the issuer’s ordinary shares.
Afterpay, Australia’s buy-now-pay-later business, has gone down this route for raising capital to finance an increase of its interest in Afterpay US Inc. from 80% to 93%.
However, Afterpay’s convertible note has a twist; the note will not pay interest. It takes one of the attractive parts of a bond, the interest, out of the equation. However, it still leaves in place the safety aspect of having a bond-like security, along with the potential upside of the call option component.
The offer of a zero-coupon convertible note is a novel approach but it is not the first ASX-listed company to do so. Xero issued a zero coupon bond in November 2020 with a December 2025 maturity date. Under the terms of the Xero convertible note, the call option has a strike price of USD$134.7246, or 35% above Xero’s share price in US dollars at the time.
Afterpay’s convertible notes have a similar conversion feature. The call option component has a strike price of $194.822, or 45% above Afterpay’s closing share price on 24 February. The maturity date is on 12 March 2026.
As with Xero’s convertible notes, Afterpay’s convertible notes will be listed on the Singapore Stock Exchange.