Bond with Warrant (BW) Complete Guide — How It Differs from Convertible Bonds

A BW (Bond with Warrant) is a hybrid security that combines a bond with a warrant to subscribe for new shares. Often compared to a CB (Convertible Bond), the key structural difference is that converting a CB extinguishes the bond, while exercising a BW's warrant leaves the bond fully intact.

In Korea, BWs are especially common among small-to-mid cap companies and in PE/VC investments. Detachable BWs account for over 80% of issuance, and refixing clause abuse has been a persistent regulatory concern.

Both CBs and BWs combine a bond with an equity option, but what happens after exercise is fundamentally different. When a CB investor converts, the bond is extinguished and shares appear — one security morphs into another. In a BW, only the warrant is exercised; the bond continues to exist independently.

From the issuer's perspective, this difference is significant. CB conversion converts debt to equity, giving the issuer cash only once. A BW gives cash at bond issuance and again when the warrant is exercised — up to two injections. Investors price this in and demand a premium, which is why BW coupons are typically lower than equivalent CBs.

A warrant is the right to purchase new shares at a predetermined exercise price (strike price). If the strike is below the current market price, the warrant is 'in-the-money (ITM)'; above, it is 'out-of-the-money (OTM)'. Exercising an ITM warrant immediately generates a gain equal to the difference.

Warrant value consists of intrinsic value and time value. Intrinsic value is max(stock price − strike, 0); time value is driven by remaining life and volatility. While Black-Scholes provides a theoretical price, detachable warrant certificates often trade with significant premiums or discounts to theoretical value due to market supply/demand dynamics.

In Korea, the most important classification for BWs is detachability. Detachable BWs issue and trade the bond and warrant certificate separately. Investors can hold the bond while selling the warrant certificate in the market.

The problem with detachable structures emerges when warrant certificates transfer to third parties. A controlling shareholder or board can issue BWs at low prices to insiders, who then separately sell or exercise only the warrant certificates for improper gains. This was at the heart of the SM Entertainment BW controversy.

Refixing is a clause that automatically lowers the warrant's exercise price when the stock price falls. When the market price drops below a certain threshold relative to the original exercise price, the exercise price is adjusted downward as well. Designed as an investor protection mechanism, it has instead become a tool for abuse in Korea.

The refixing vicious cycle: stock falls → refixing triggered → more potential new shares → dilution fears cause further price decline → more refixing. More seriously, controlling shareholders can intentionally depress the stock price to trigger refixing and then exercise warrants at a lower price for profit. Korea capped refixing at 70% of the original exercise price starting in 2013 to curb this.

BWs are used globally but with markedly different structures, preferences, and regulatory environments by region. Korea has the most active BW market. The US favors standalone warrants (e.g., SPAC warrants). Japan uses BWs as mezzanine financing for SMEs. Europe prefers non-detachable, no-refixing structures.