(This article appears courtesy of International Financial Law Review,  sign up for a free trial here) The attractiveness of equity markets in 2006 has resulted in increased interest in pre-IPO convertible bond structures in Europe. This asset class has hitherto been more common in the higher growth economies of Asia, but landmark transactions such as that by Angara Mining plc (the first UK company to issue a pre-IPO convertible bond in the public markets) suggest that pre-IPO convertible bonds are now a realistic alternative for European companies in need of growth capital.

What is a pre-IPO convertible? Unlike a traditional convertible bond, which is generally issued by a company that already has a public listing for its equity, a pre-IPO convertible is a debt security issued by an unlisted company. Upon an IPO which meets certain size and liquidity criteria, often referred to as a qualifying IPO, the debt security becomes convertible at the option of the bondholder (or, in some instances, is mandatorily converted) into shares. Until the IPO occurs, the bond is effectively a straight debt instrument that will be redeemed in cash on maturity.

The attractions

Given the nature of the companies raising this type of finance, the pre-IPO convertible is an alternative to more traditional bridge financing or private equity funding.