Virgin Galactic (NYSE:SPCE) has had anything but a great start to 2022. In 2021, SPCE stock peaked to as high as $62 on speculation of potential space travel developments. During that year, Virgin Galactic successfully launched its anticipated VSS Unity spacecraft that carried none other than CEO Richard Branson himself. The spacecraft reached an altitude of 282,000 feet and was able to accelerate at speeds three times faster than the speed of sound. However, shares of Virgin Galactic are crashing back toward Earth today, down more than 15% at the time of writing.
So, why is SPCE stock plummeting today?
Virgin Galactic announced this morning that it would add up to $500 million worth of debt. Out of the $500 million, $425 million will be issued from the “sale of 2027 convertible senior notes through a private offering.” The remaining $75 million will be an option that is expected to be offered to buyers of the new convertible senior notes. The convertible senior notes will carry a maturation date of February 1, 2027. Furthermore, Virgin Galactic will reserve the right to redeem the senior notes if “the last reported sale price per share of Virgin Galactic’s common stock exceeds 130% of the conversion price for a specified period of time and certain liquidity conditions have been satisfied.”
Speaking on how the funds will be used, Virgin Galactic stated, “The company intends to use the net proceeds from the offering to fund working capital, general and administrative matters and capital expenditures to accelerate the development of its spacecraft fleet.”
Why Is SPCE Stock Issuing Convertible Notes?
Companies seek to issue convertible notes for several reasons. For example, companies may issue convertible notes to delay dilution of shares outstanding. Convertible notes can be converted to newly issued shares of the underlying stock when certain conditions are met, such as if the stock hits a certain price or the note expires. The issuing company may also redeem, or call, the note when the note approaches the conversion price. A company will call a note to reduce its cash payout to the note holder. However, a company must communicate with note buyers beforehand the provisions for calling a note.
Companies may also issue convertible notes to lower the cost of interest on debt. Convertible notes usually carry a lower interest rate than regular notes because of their conversion feature. Investopedia adds that, “Companies with weak credit ratings that expect their earnings and share prices to grow substantially within a specific time period also tend to favor convertible bonds.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
