Convertible bonds may lose shine

The use of convertible bonds has been thrown into doubt, after Simon Ball,
the finance director of 3i, admitted the venture capital group was closely
monitoring the future use of the instruments because of IFRS.

Convertible bonds, which allow companies to make returns to investors with
cash or shares, have always been a popular way of raising capital because of
their flexibility.

The fair value requirements of IFRS, however, mean that companies with
surging share prices suffer blows to their reported profits because of the
equity element in the convertible bonds.

3i, which delivered a 40% increase in its share price during the financial
year, suffered a £78m hit to pre-tax profits of £852m for the year ended 31
March 2006 because of the IFRS changes. This prompted Ball to say that the FTSE
100 private equity player would review the use of convertible bonds in the

‘It [the convertible bond] gives us flexibility around capital management
going forward. For the moment, we’ve chosen to retain that flexibility, but it’s
something that we keep under constant review and will do right through to the
conversion period,’ Ball said.

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Fiona Westwood of Smith and Williamson.