Sony is turning to the open market to raise money for a new expansion, the company announced yesterday. The plan is to raise 150 billion yen (about $1.9 billion) by selling 5-year convertible bonds, its first such sale since 2003, reports Bloomberg. Of the cash, 60 billion will be used to invest in CMOS image sensor production (separate from its investment in June), another 60 billion will repay debts from its Gaikai and Olympus share acquisitions, and 30 billion will repay other bonds that are coming due next year.

Constrained by a low credit rating

Last week, Moody’s cut Sony’s credit rating to near-junk status and an analyst at Fisco Ltd. postulated to Bloomberg that the company didn’t have much of a choice about how to raise capital. "Its credit ratings have been cut and an equity finance would lead the shares to decline because of the dilution," he said. Nikkei reports that Sony also considered ordinary bonds but was constrained by its poor credit rating. It's also telling that the cash injection isn’t coming from the Sumitomo Mitsui Financial Group, Sony’s largest individual shareholder.

If everyone converts, existing shares are worth 16 percent less

The convertible bonds mature in 2017 and give holders the option to convert their investment to stock at the price of ¥957 a share --- a ten percent premium over Wednesday's closing price. Investors get the potential upside of turning their bonds to shares if Sony does well, but are less exposed to the downside risk of a fall in share price. The market didn’t take kindly to the news, though, with Sony’s share price dropping to a 32 year low. If all of the new convertible bonds are exchanged for stock, the extra 156 million or so shares will dilute shareholders’ existing investments by around 16 percent.

In recent years the imaging division has been one of Sony’s top performers, and was identified by CEO Kazuo Hirai as one of the company’s pillars for future growth when he took the reins in April. The proliferation of camera phones and corresponding drop in point and shoot sales have hurt Sony’s Cyber-shot line, but it remains a strong competitor in other arenas with its NEX line of mirrorless cameras, its more DSLR-like Alpha line, its professional cinema gear, and its expanding medical imaging business. During the Q&A following Sony’s recent Q2 earnings call, CEO Hirai reinforced the benefits of the division's diversified nature, pointing out that the company makes money both from the cameras it manufacturers and the sensors it produces for competitors’ products, including smartphone cameras.