TheCorporateCounsel.net

John blogged last week that debt offerings are having a moment – in large part to fund AI-related capex – and “hyperscalers” are negotiating atypical terms. The AI boom is also one factor that’s driving a surge in convertible notes issuances, according to this Cleary memo.

In the converts space, PIPEs and pre-IPO issuances are becoming more common – and the notes often look different than their traditional counterparts. The memo says that PIPE convertible notes are including bespoke features such as:

– Governance rights, such as board or observer seats, and the right to vote the underlying shares on an as-converted basis.

– Consent rights over items such as changes of control, M&A or other extraordinary transactions; material asset sales, investments, expenditures, borrowings, or issuances; related party transactions; material changes to organizational documents or lines of business; and other material adverse changes.

– Guarantees or collateral.

– Financial covenants.

– Prepayment provisions.

– Purchase price adjustments beyond standard anti-dilution provisions in capital markets convertible notes – e.g., ratchets for lower-priced issuances within a certain period.

– Equity sweeteners, such as warrants.

– Paying interest cash or in kind (PIK interest), or a combination of the two.

– Alternative return calculations – e.g., based on a specified internal rate of return (IRR) or multiple on invested capital (MOIC).

– An extended lock-up or standstill for the investor, as well as restrictions on hedging and transfers.

– Registration rights to facilitate SEC registered resale.

– Issuing in the form of preferred stock, rather than debt.

The memo says that converts are also playing a growing role in the pre-IPO ecosystem, with pre-IPO convert deals often involving discussions of similar features as PIPE converts. See the memo for a more nuanced discussion. If you’re looking for more on converts, check out our “Convertible Debt” Practice Area for more resources.

– Liz Dunshee