Virgin Galactic (NYSE:SPCE) had anything but a great start in 2022. In 2021, the SPCE share peaked at up to $ 62 based on speculation about the possible development of space travel. This year Virgin Galactic successfully launched his anticipated VSS Unity spacecraft, which carried none other than CEO Richard Branson himself. The spacecraft reached a height of 282,000 feet and was able to accelerate at speeds three times the speed of sound. However, Virgin Galactic shares are falling back to Earth today, falling more than 15% at the time of writing.
So why are SPCE shares falling sharply today?
Virgin Galactic announced this morning that this will increase $ 500 million in debt. Of the $ 500 million, $ 425 million will be issued from “2027 Interchangeable Banknote Sales Through Private Offering.” The remaining $ 75 million will be the expected option offered to customers new convertible banknotes. Convertible senior bonds will have a maturity date of 1 February 2027. In addition, Virgin Galactic will reserve the right to repurchase higher bonds if “the last reported selling price per Virgin Galactic ordinary share exceeds 130% of the conversion price for a specified period and specified liquidity conditions are met. “
Virgin Galactic said of how the funds will be spent: “The company intends to use the net proceeds from the offer to finance working capital, general and administrative matters and capital expenditures to accelerate the development of its spacecraft fleet.”
Why do SPCE shares issue convertible banknotes?
Companies are working to issue convertible banknotes for several reasons. For example, companies may issue convertible bonds to defer the dilution of outstanding shares. Convertible bonds can be converted into newly issued shares of the underlying share when certain conditions are met, for example, if the share reaches a certain price or the bond expires. The issuing company may also redeem or recall the banknote as the banknote approaches the conversion price. The company will call the banknote to reduce its cash payout to the banknote holder. However, the company must first communicate with the banknote buyers with the banknote recall provisions.
Companies can also issue convertible bonds to reduce the cost of interest on debt. Convertible banknotes usually have a lower interest rate than regular banknotes due to their conversion function. Investopedia adds that “companies with a weak credit rating, which expect their profits and share prices to rise significantly over a period of time, also favor convertible bonds.”
At the date of publication, Eddie Pan did not have (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author and are the subject of InvestorPlace.com Guidelines for publication.