Why would Xero do this: It gains access to nearly a billion at a...

• Why would Xero do this: It gains access to nearly a billion at a relatively low interest rate (1.375% to 1.875% as cited in the AFR). This can be used for various purposes, such as growth initiatives, acquisitions, or even share buybacks.

Convertible Notes

You're right that convertible notes are often associated with early-stage companies. However, they can also be used by mature companies like Xero for several reasons:

• Lower Interest Rates: Convertible notes typically have lower interest rates than traditional debt because investors have the potential to benefit from share price appreciation.
• Delayed Dilution: Conversion to equity is delayed, which can be beneficial for companies concerned about immediate dilution of existing shareholders.
• Flexibility: Convertible notes can be structured with various terms to meet the specific needs of both the company and investors.

Why Exotic Debt for a Cash-Rich Company?

While Xero may have a net cash position, there are reasons why they might choose convertible notes over traditional bank loans:

• Strategic Flexibility: The funds raised can be used for strategic initiatives without the constraints of a traditional loan agreement.
• Interest Rate Environment: If interest rates are low, convertible notes can be a cheaper source of financing than bank loans.
• Investor Demand: There might be strong investor demand for Xero's convertible notes, allowing them to secure favorable terms.

Bank Facility vs. Convertible Notes:

While a bank facility might seem simpler, it doesn't offer the same potential upside for investors as convertible notes. Additionally, bank loans often come with stricter covenants and restrictions on how the funds can be used.

In conclusion:

Xero's move is a strategic financial decision aimed at maximizing value for both the company and its investors. While it might involve some complexity and transaction costs, the potential benefits of lower interest rates, delayed dilution, and strategic flexibility outweigh the drawbacks for a company in Xero's position.

(thanks Gemini)