What is a convertible?
Convertibles are hybrid financial instruments that contain debt and equity features. The debt feature yields fixed-interest payments, and the equity feature provides the holder of the convertible the right but not the obligation to convert the convertible into a predetermined number of shares.
When should I use a convertible?
There a number of considerations to be balanced in determining the most appropriate non-grant financing options (or blend of options).
Due to their debt and equity characteristics, convertibles could be used where the Government is seeking financing optionality in the investment. The debt and equity features of convertibles provide Government characteristics similar to a commercial loan, and equity (where exercised). The hybrid nature of convertibles brings additional complexity in their establishment and ongoing management compared to loans and equity, thus convertibles require appropriate expertise and oversight. Convertibles are complex financial instruments and care should be exercised in their use.
Characteristics of convertibles
Accounting and budget classification and reporting of convertibles
As a holder of convertibles, accounting standards classify convertibles as financial assets. Convertibles are held at fair value with all movements feeding through profit and loss. In addition to Annual Reporting requirements in accordance with the relevant accounting standards, convertibles that exceed a quantifiable value of $20 million in any one year or $50 million over the forward estimates, and if its impact were not otherwise captured within the Budget estimates are subject to additional disclosure requirements in the Statement of Risks in Budget Paper 1 – Budget Strategy and Outlook.