👉 Background: Regional Express, also called Rex, launched back in 2002 as an airline that specialised in regional routes around Australia. It listed on the ASX in 2005, and become prominent during COVID times after expanding its flying routes to include the Golden Triangle of Australia (Melbourne, Sydney and Brisbane).

👉 What happened: In 2020, Rex saw its opportunity to own a big chunk of these Golden Triangle routes and borrowed $150 million in convertible notes from a private equity firm named PAG. Now, it’s time to pay back PAG… with equity.

👉 What else: On top of this, Rex has suffered from major board disputes recently, and has now entered voluntary administration, with up to 610 jobs expected to be axed. It's believed that the convertible note was the trigger for Rex's sudden downfall.

What's the key learning?

💡Convertible notes are short-term loans that convert into equity in the company at an agreed conversion event in the future.

💡This conversion event could be based on a whole range of things:

• At the sale of the company or IPO
• If specific performance targets are met
• At a specific date, called the “maturity date”
  

And, the original amount lent plus any interest accrued will convert into equity.

💡In the case of Rex, the convertible note allowed the lender, PAG, to earn 4% interest per annum and convert its loan into equity at $1.50 per share…but currently Rex’s share price is 56c. So, it’s unclear if or when PAG will convert these shares or even get their money back.