medium · Investment Banking

In an LBO scenario, why might a financial sponsor prefer the target to have out-of-the-money convertible bonds rather than in-the-money bonds?

1. The interest on ITM bonds is higher than the interest on OTM bonds.
2. OTM bonds allow the sponsor to avoid paying the control premium.
3. In-the-money bonds increase the equity purchase price by adding to the diluted share count.
4. Out-of-the-money bonds are automatically wiped out in a change-of-control.

Sign up free to see the explanation and track your rank →