Explanation of Convertible Debt

With this post I will attempt to explain how convertible debt works. Let's go with a hypothetical situation. A lender lends TPAC $40,000 in the form of a convertible note. The note bears nominal interest of say 8%. The lender holds the note for six months. During that six months, TPAC can repay the note. If TPAC does so there is a prepayment penalty ranging from 10-50% depending when the repayment occurs. The closer to the sixth month, the higher the prepayment penalty.

Now let's assume TPAC doesn't repay the note.  At the end of the six months the lender can convert the money owed into shares of TPAC. They can do this at an agreed upon discount to market. The discount ranges from 40-50% of the lowest closing bid, generally with a 5-10 day look back.  Everyone’s formula is somewhat different, but this is the general rule. So they get shares at 50-60% of the low bid. They request the shares and within a day they are issued restricted shares. These shares cannot be sold. So the days hey receive these shares they request that the restriction be lifted. That's done usually within 24-48 hours. At that point they can sell the shares.

They do not convert all of the note into shares at one time. They want to hold less than 5% of the outstanding shares at any one time, so they go through several conversions. The number of conversions is based on the amount of the note, the closing bid price and the 5% limitation. So while a note may be eligible to and start to convert in early May, this conversion process may take several days or weeks to complete, depending on the above factors and depending on how aggressive the lender is in converting. 

All lenders request that TPAC and the transfer agent hold in reserve a sufficient number of authorized shares to allow for the conversion. The reserve amount is generally a 3x multiple of the anticipated conversion price.  If at the time of conversion there are not enough shares reserved for a particular lender, then the reserve will be increased. If following complete conversion there are shares remaining in the lender’s reserve, those remaining shares will be placed back into the company’s pool of authorized but unissued shares. 

I hope this explanation provides a clearer picture of the conversion process and I apologize for any past confusion created.


Bill McKay