Contingent Convertible Lease or Debt?

This paper focuses on examining the interaction between investment and financing strategies in a dynamic model with existing assets and a growth option where the investment cost can be financed either by contingent convertible leaseequity or by convertible debt-equity. It aims to study the impact of these two models as a financing instrument on conversion timing, conversion rate and the optimal value of the firm in different scenarios. The difference between CoColease and CoCodebt contracts from a modeling point of view is explored by examining the company’s closed solutions using the real options approach and risk-free price theory. The results reveal that the convertible lease with low amortization value and sufficiently high conversion rate has less severe inefficiencies resulting from risk transfer and debt overhang than those caused by convertible debt. In particular, with a high landlord tax rate equal to τ_ι = 0,3, shareholders will experience a distortion of debt overhang and will have strong incentives to transfer risks. The conversion time may be delayed with conditional convertible lease financing instead of convertible debt. The research work concludes that financing through convertible leasing contracts with a low amortization value is more advantageous than that of CoCo debt, but if the lessor’s tax rate is high, the opposite may be true.

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