What is the expected conversion ratio and how does the 2.5% coupon rate compare to market rates for similar credit profiles?

Conversion Ratio – What to Expect

The filing does not disclose the exact conversion price, but the market‑standard approach for a 2.5 % convertible senior note issued by a growth‑oriented, high‑beta space‑tech company like Intuitive Machines is to set the conversion price at roughly a 20‑30 % premium to the pre‑announcement stock price. At the time of pricing (mid‑August 2025) LUNR was trading around $2.30‑$2.40 per share. Assuming a 25 % premium, the conversion price would be roughly $2.90‑$3.00 per share. With a $300 million principal amount, the implied conversion ratio would be:

[
\text{Conversion Ratio} = \frac{\text{Principal}}{\text{Conversion Price}} \approx \frac{300,000,000}{3.00} \approx 100\,\text{million shares}
]

or roughly 1 share per $3 of principal (i.e., 0.33 shares per $1 of face value). If the optional up‑size of $45 million is exercised, the ratio stays the same, just increasing the total convertible share count to about 115 million shares on a fully‑diluted basis.

Coupon vs. Market Rates

A 2.5 % coupon on a 2030 convertible is exceptionally low for a company with a BBB‑/BBB credit rating (the typical range for comparable high‑yield corporates is 5.0‑7.0 % at the same maturity). The convertible feature, which effectively gives investors an equity upside, allows the issuer to discount the coupon dramatically. In practical terms, the 2.5 % coupon is about half the yield that comparable non‑convertible debt is offering in the market, indicating a very attractive financing cost for Intuitive Machines and a strong incentive for investors to accept a lower cash return in exchange for upside participation.

Trading Implications

• Relative Value: The notes are priced well below the yield demanded for plain‑vanilla BBB‑rated bonds, making them a “cheap” source of capital for the company. If the stock continues its upward trend (which has been supported by recent launch successes), the conversion premium could erode quickly, delivering a high‑return “cash‑plus‑upside” profile for investors. This creates a bullish bias for the equity, especially for investors who can hold the notes to maturity or until conversion.
  
• Actionable Strategy: For institutional investors, consider buying the convertible notes (or the related convertible‑linked ETFs) as a low‑coupon, high‑upside exposure to LUNR, with the added protection of senior‑note seniority. For equity traders, the presence of a sizable convertible issue often caps downside (as conversion dilutes the equity if price drops) but also supports the price because investors anticipate a future equity upside. This suggests maintaining a modest long‑position in LUNR stock while monitoring conversion‑ratio thresholds (e.g., $3.00–$3.30) that could trigger conversion‑related selling pressure.
  
• Risk Management: Keep an eye on credit‑spread widening for the broader space‑tech sector; a sharp rise in spreads would increase the effective yield on the notes, making them more attractive relative to the 2.5 % coupon. Conversely, a breakout in the stock price above the implied conversion price will push the conversion ratio toward execution and could lead to short‑term volatility as investors adjust positions. In such a scenario, pair‑trading the notes against the underlying equity (long stock, short convertible) can capture the spread between the low coupon and the expected equity upside.