Variable-price conversion
Also called: variable conversion price, market-based conversion, discount-to-market conversion
A conversion feature where the price at which a note or preferred converts into common stock is reset to a formula based on recent trading prices, often at a discount.
Last verified
How it works
Instead of a single fixed conversion price, the security converts at a price calculated each time the holder converts. A typical definition reads like "the lesser of (a) $2.00 and (b) 85% of the lowest VWAP during the ten trading days before the conversion date". The window of days is the lookback period, and the percentage below market is the discount.
The structure exists in milder and more aggressive forms. A security that converts at the market price only after a default, or that has a floor price, behaves very differently from one that always converts at a deep discount to the lowest price in a long window.
Worked example
Hypothetical: Company X has preferred stock with a $500,000 stated value convertible at 85% of the lowest daily VWAP over the prior ten trading days. The stock traded between $1.10 and $1.40 over that window, with a lowest VWAP of $1.12. The conversion price is $0.952, so a holder converting $100,000 of stated value receives about 105,042 shares. If the stock is at $1.30 on the day of conversion, those shares are worth roughly $136,555.
Why it matters
The discount and the lowest-price lookback mean the holder can usually sell newly issued shares above its conversion price. Repeated conversions add supply, and if the price falls, each conversion produces more shares. When there is no minimum price, the security is a floorless convertible.
How to spot it
Read the definitions section of the note, warrant or certificate of designation filed as an exhibit to an 8-K or registration statement. Search for "Conversion Price", "lowest", "VWAP" and "Alternate Conversion Price". The guide Toxic convertibles walks through real-world term language.
Related terms
Guides that use this term
Toxic financing · 6 min read
Toxic Convertibles Explained, From Variable Conversion Prices to No Floor
How variable-price convertible notes work, why a discount to VWAP and a lookback window matter, and what happens to share counts when there is no floor.
Research pages · 6 min read
How to Read the Dilution Pressure Score: Score, Max Measured and Risk Levels
The seven components of Signal8's Dilution Pressure Score, why it reads as points out of points measured, and how the risk levels and lower bounds work.