I have said it before but I think it bears repeating. Those of us focused on investing in shares should not ignore the corporate bond market. Financing has a direct impact on a company’s prospects, and most indicators impact both debt and equity. Today, Trainline (LSE: TRN) has seen its share price down about 7% because of the potential dilution from its new convertible bond.
Why is a bond hurting the Trainline share price?
For those who are not sure, a bond is simply a debt security. A company or government borrows money from investors, in return for a fixed interest rate (called a coupon) over a fixed period of time.
A convertible bond, like the one that is hurting the Trainline share price today, takes this one step further. A convertible bond allows the holder to change the bond into shares if they want to. These shares are almost always newly issued, which mean they dilute current shareholder positions.
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Dilution hurts a share price because it means a company of the same value is divided into more pieces. In a simplified example, if a £1m company had 1 million shares in issue, each would be worth £1. If the next day that same £1m firm issued a further 1 million shares, each would now be worth just 50p.
This is why today’s news from the Trainline that it will be issuing a new £150m convertible bond is hurting its share price so much.
More problems
The company said it is issuing the bond in order to provide liquidity, “protecting the business further in an extended Covid downturn scenario”. If people are not booking trains, then Trainline is not making money. Further lockdowns in the UK will only make this worse.
Its first-half results in November showed some worrying figures. Ticket sales were just 19% of the level from the previous year, while revenue was about a quarter of H1 2019 and gross profit was one-fifth. Unlike the train companies themselves, Trainline has not benefited from government backing.
Trainline may see its share price hit in the long run if travel patterns change. Lockdowns are forcing many people to work from home, and some believe this will become a permanent trend.
It has been shown now that people don’t need to be in an office to do their job. It seems ever more likely that even when lockdowns end, many more people will be working from home. For many commuters, particularly those traveling into London in the South East, this means less train travel. Less train travel means fewer bookings through Trainline.
The Trainline share price may be down today because of the dilution impact of its new convertible bond, but its problems are far more fundamental. Personally I struggle to see much to be positive about for the company right now.
