Convertible notes explained: how a soaring valuation can show up as a huge loss

A company can become far more valuable and report a much bigger loss in the same year. One possible link is a convertible note: a loan whose holders can swap it for shares. As the shares become worth more, so does the right to receive them, and some issuers record that increase in their income statement. Reuters reported on 20 October, citing a draft prospectus it reviewed, that Anthropic's first-half 2026 loss "included a $72 billion accounting charge reflecting an increase in the estimated value of bonds that could eventually convert into Anthropic shares, rather than cash costs tied to its operations".

Three companies' filings with the US Securities and Exchange Commission (SEC) show how these instruments work: CoreWeave's 2033 notes, Nebius's two series sold in August 2026, and Nscale, whose registration statement details how a fair-value loss arose. The examples show mechanics only; Polstob takes no view on any company's shares or notes.

The SEC's investor education site, Investor.gov, describes a convertible security as one, "usually a bond or a preferred stock", that can be exchanged for a different security, normally the company's common stock. The holder usually decides whether and when to convert, though in some deals the company holds that right. Companies generally issue them to raise money, the SEC says: some that could borrow or sell shares in the usual way may choose convertibles for particular business reasons, while others that may be unable to find conventional funding sometimes use them to raise cash faster.

In a conventional deal the conversion terms are generally fixed: the note turns into stock at a set price, and the deal may include caps or other features meant to limit dilution. A riskier kind ties the number of shares to the market price at conversion, often at a discount, so a lower share price means more new shares. Investor.gov says such deals have been nicknamed ""floorless", "toxic," "death spiral," and "ratchet"" convertibles. The three examples below are not of that kind: CoreWeave's pricing release and Nebius's pricing release give fixed initial conversion rates, subject to adjustment, and Nscale's notes converted at a set $2.38 a share.

The coupon is the interest rate the note pays. The conversion rate is how many shares each $1,000 of notes can become; divide $1,000 by it and you get the conversion price, about $97.85 here, as CoreWeave's release states. The premium is how far that price sat above the share price when the deal was priced: about 22.50% above $79.88.

CoreWeave said its capped calls are expected generally to reduce potential dilution on conversion, or offset cash payments above the notes' principal. Above the $199.70 cap, though, it said "there would nevertheless be dilution" or no such offset. The release also warns that the banks' hedging of those contracts could move the price of the shares or the notes.

Nebius Group closed a $5.75bn offering on 24 August 2026 in two series: $3.45bn of 0.50% notes due 2030 and $2.3bn of 4.50% notes due 2034, sold privately to qualified institutional buyers under the SEC's Rule 144A, according to its closing release. Alongside the pricing, it agreed with some holders of older convertibles to exchange $400m of 2.00% notes due 2029 and $400m of 3.00% notes due 2031 for about 15.8 million Class A shares. Nebius warned that those holders' share sales or hedging "could decrease (or reduce the size of any increase in) the market price" of its shares. It plans to spend the money on data centres, GPUs and other parts of its business.

Accounting rules do not all treat a convertible the same way. The key measure is fair value, which Nscale's S-1 defines as "the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date".

Some issuers carry the whole note at fair value and run each change through profit or loss. Nscale, an AI infrastructure company that reports under US GAAP and has filed an S-1 with the SEC, chose that route for its Series A convertible notes. Its S-1 says it elected the fair value option "for simplification and cost-benefit considerations", rather than separating out the embedded derivatives. The notes were then remeasured at fair value on a recurring basis, using a binomial lattice model whose key unobservable inputs included Nscale's own equity value.

The company issued about $155.0m of the notes from November 2024 to January 2025, convertible into Series B preferred shares at $2.38 each, and $10.0m more in July 2025, which the S-1 says had a fair value at issue of $28.9m (its table shows $25.9m of 2025 additions). The model's equity value per share rose from $2.53 at 31 December 2024 to $6.33 at 30 September 2025, and the notes' fair value climbed. The S-1 text puts the resulting losses at $6.8m for 2024 and $310.7m for 2025. By Polstob's calculation, the 2025 figure equals the table's $299.7m for the notes plus $11.0m for the greenshoe option, and $6.33 is about 2.7 times the $2.38 conversion price.

The S-1 describes the fair-value adjustments as unrealized gains and losses. When the notes converted on 8 October 2025, they came off the balance sheet and equity was recorded at their fair value of $482.9m, for 76,266,571 Series B preferred shares. The charge is non-cash; the cost to existing owners shows up as those new shares and the smaller slice of the company each old share represents.

Reuters, citing the draft prospectus, reported a first-half 2026 net loss of $80.7bn, against $13bn a year earlier, including the $72bn charge. Its 20 October report adds that Reuters had reported in September that most of Anthropic's $42bn net loss for 2025 came from a similar charge, and says the notes' estimated fair value tripled from a year earlier as Anthropic's valuation rose. These figures are not from a public filing. Polstob found no public Anthropic S-1 on the SEC's EDGAR system at 08:28 CET on 26 October, and the reports do not say which accounting method Anthropic used.