How might the convertible notes impact the existing capital structure and potential dilution for shareholders?

Impact on the capital structure

The $650 million private placement of 10‑year convertible senior notes adds a sizable new layer of debt to Centrus’ balance sheet. Because the notes are senior, they rank ahead of any existing unsecured or subordinated borrowings, increasing the company’s leverage ratio and tightening its credit profile. However, the “convertible” feature means that a portion of this senior debt will eventually be swapped for equity—provided the notes are exercised at a conversion price that is attractive relative to the market. If the conversion price is set near the current trading level, the notes will sit on the balance sheet as a long‑term liability for most of their life, limiting immediate dilution. If the stock price climbs above the conversion price, the conversion incentive sharpens and the potential for a sizable equity issuance rises, which would expand the share count, depress earnings per share (EPS) and dilute existing shareholders.

Potential dilution and trading implications

From a dilution standpoint, the worst‑case scenario is a full conversion at the note’s conversion price, which could increase the outstanding share base by a double‑digit percentage (the exact magnitude depends on the conversion ratio). Until conversion, the dilution risk is “latent” and priced into the note’s yield: investors demand a higher coupon to compensate for the conversion option, so the notes will likely trade at a spread above Treasuries. For equity traders, two key signals should be watched:

1. Credit‑spread dynamics: A widening spread on the notes (or a drop in their price) may signal market concerns about conversion risk or credit quality, prompting a short‑term sell‑off in both the bond and the equity. Conversely, a narrowing spread—especially if the stock is rallying—suggests that the conversion premium is being eroded, raising the probability of future dilution and supporting the equity’s upside.

2. Stock price relative to conversion price: If the common stock begins to trade comfortably above the conversion price, conversion probability spikes. In that regime, the equity may start to price in the dilution effect (lower forward‑PE, higher forward‑EV/EBITDA) and could see a modest pull‑back as investors re‑price the larger share pool. Conversely, if the stock remains below the conversion price, the notes act more like traditional senior debt, and the equity can be viewed as relatively “protected” from dilution, making it a more attractive long‑position.

Actionable take‑away

• Short‑term: Monitor the note’s secondary‑market spread and any changes in the company’s leverage ratios. A sudden widening of the spread without a corresponding credit‑rating downgrade could create a tactical buying opportunity in the notes (high‑yield) while the equity may stay flat or modestly decline.
• Medium‑term: Keep the stock’s price trajectory relative to the conversion price in focus. If the equity breaches the conversion price and holds, position for potential upside on the stock while preparing for a dilution‑adjusted pull‑back—e.g., by scaling in with a modest long position and hedging with a short position in the convertible notes or a put spread. If the stock stays below the conversion price, the equity remains largely undiluted, and a bullish stance can be maintained with limited downside risk.