American depositary receipts of NIO (ticker: NIO) fell in response, putting them on course for their biggest percentage decline in almost a year. One reason is that convertible bonds can be turned into shares in the company, potentially diluting the stakes of existing holders.
Companies like convertible bonds because they allow companies to borrow money at lower interest rates than standard corporate bonds.
NIO plans to offer about $1 billion in convertible bonds. Specific details, including the number of shares the bonds could convert to, aren’t yet known. Final terms will be disclosed when the deal approaches completion.
The conversion price will be close to, or a little higher than, NIO’s current stock price. If that is the case, the bonds might be converted into roughly 90 million shares. There are currently about 1.7 billion shares outstanding, including those underlying NIO ADRs, which means the dilution could be about 5%.
NIO ADRs were down almost 14% in midday trading, while the S&P 500 and Nasdaq Composite were off 0.7% and 0.8%, respectively. Shares were on pace for their worst one-day loss since a loss of nearly 16% on Oct. 24, 2022, according to Dow Jones Market Data.
The size of the drop is a little surprising. Fisker stock (FSR) dropped about 4% after the company announced plans to sell about $340 million of convertible notes in July. Those notes might eventually become about 44 million shares, or about 13% of the shares currently outstanding.
Nikola stock (NKLA) dropped about 6% after management announced a $325 million convertible-note sale in August. Dilution could be in the range of 25%.
Each deal, of course, is a little different.Each stock is in a unique situation ahead of any offering.
Coming into Tuesday trading, the NIO ADRs have gained more than 5% this year, but are still almost 50% lower than they were 12 months ago. The company has racked up losses this year as it competes in a crowded market for luxury EVs.?
“The company plans to use a portion of the net proceeds from the Notes Offering to repurchase a portion of the existing debt securities, and the remainder mainly to further strengthen its balance-sheet position as well as for general corporate purposes,” the company said in a statement. That is typical language in a bond deal.
NIO ended the second quarter with about $4.3 billion in cash on its books. Wall Street projects the company will use roughly $250 million to $300 million per quarter to build its business over the coming year.
NIO has delivered 94,352 EVs this year through August, up from 71,556 over the same span in 2022.
Write to Brian Swint at [email protected]