Uber Offers $1.2 Billion Exchangeable Bond to Unlock Value in Aurora Without Selling

Uber can delay paying taxes on any profits from its investment until the exchangeable matures, in addition to retaining some of the upside.

Uber Technologies announced a $1.2 billion exchangeable bond deal, which is tied to its shares in a self-driving truck company, shows how an unconventional financial move can be more attractive to investors.

The San Francisco company issued exchangeable bonds linked to its ownership in Aurora Innovation with no discount and a 16.1% conversion premium above the marketed range.

The rare structure was bonds that convert into equity in another company if the underlying stock surpasses a predetermined price after a specified period.

The bondholder will get ownership if share prices increase beyond the conversion threshold. If the stock drops, the holder can wait and receive the bond’s par value back at maturity.

David Hulme, managing director and portfolio manager at Advent Capital Management, stated that the investors found it attractive because of Uber’s investment-grade credit rating and the underlying equity in the highly volatile shares of Aurora, a self-driving truck company.

Convertible instruments with volatile underlying shares have attracted investors who want to make a long-term bet on rising share prices, and the attention of hedge funds that buy the bonds and sell the underlying stock short.

According to Hulme, an exchangeable issue was more attractive for Uber than selling its Aurora stock through block trade, which might need a 5%–10% discount. The company holds almost a fifth of Aurora shares based on the outstanding stock listed in its filings.

Uber will have to delay paying taxes on any profits from its investment until the exchangeable matures, in addition to retaining some of the upside.

Michael Youngworth, a Bank of America Corp strategist, states that this bond structure is rare, making up only 6% of all US convertible bonds issued during the last five years.

The conditions for convertibles are comparatively attractive since US equity-linked issuance was down 12.5% compared to last year.

Uber CEO Dara Khosrowshahi characterized the bond offering as “opportunistic” and a “creative financial mechanism” to fund the upcoming investments in the autonomous car ecosystem.

The bond has reached $120 within just a few days after pricing at par.

Aurora shares have fallen 15% after the announcement. Khosrowshahi aims to reassure the company’s investors that Uber will continue to own Aurora shares, even though he resigned from his position on Aurora’s board.

What appears to be Uber’s best capital-raising strategy may not be effective for many other companies. For the arbitrage deal, the company must have adequate shares for hedge funds to short the stock.  

According to Raj Imteaz, head of convertible and equity derivatives advising at ICR Capital and an independent consultant to convertible debt issuers, a company with strong credit and a sizable enough investment in another company are prerequisites for issuing an exchangeable debt.

John Malone’s massive Liberty Media giant has continuously issued exchangeable debt in the United States. Liberty Broadband Corp. raised $860 million in June 2024 by selling bonds that were 3.125% convertible into its stock in the cable business. Charter Communications Inc. Charter shares increased to their highest level since 2023 after it agreed to combine with Cox Communications in a cash and stock deal.

Exchangeable instruments are relatively popular in Asia. Baidu Inc., a Chinese internet business, raised $2 billion in March by selling bonds convertible into shares of Trip.com Group Ltd., an online travel agency registered in Hong Kong.

With more deals getting done, companies hope to profit from their ownership of other companies.

Youngworth of Bank of America stated that it is an appealing option for companies looking to divest stakes in subsidiary companies, given how inexpensively they can get funds from this structure.