- If it is intended to provide a minimum value for the convertible at maturity, exchange may be into a sufficient number of shares (based on the stock price at maturity) to provide that minimum redemption value.(More...)
If it is intended to provide a minimum value for the convertible at maturity, exchange may be into a sufficient number of shares (based on the stock price at maturity) to provide that minimum redemption value. Such exchangeables may be said to be "redeemed into equity", and care should be taken when reading the offering documentation, lest "redemption" and "conversion" are confused.
[3] Perversely, the lower the yield on the bidder"s shares, the easier it is for the bidder to create a higher conversion premium on the convertible, with consequent benefits for the mathematics of the takeover. In the 1980"s, UK domestic convertibles accounted for about 80pct of the European convertibles market, and over 80pct of these were issued either as takeover currency or as funding for takeovers. They had several cosmetic attractions.
[3] The cosmetic benefits in (1) reported pro-forma diluted earnings per share, (2) debt gearing (for a while) and (3) pro-forma consolidated pre-tax profits (for convertible preference shares) led to UK convertible preference shares being the largest European claas of convertibles in the early 1980s, until the tighter terms achievable on Euroconvertible bonds resulted in Euroconvertible new issues eclipsing domestic convertibles (including convertible preference shares) from the mid 1980s.
[3] Convertible preferred stock, ( convertible preference shares in the UK), is similar in valuation to a bond, but with lower seniority in the capital structure.
[3] OCEANEs (or Obligation Convertible En Actions Nouvelles ou Existantes) are bonds which may be converted into the equity of the issuer, but the issuer has the right to deliver new shares or old shares held in Treasury (possibly with different dividend rights). They are a common structure for French issues. These bonds are technically not convertibles, as defined by the law of 25 February 1953.
[3] Compare the equity dilution on a convertible issued on, say, a 20 or 30pct premium to the higher equity dilution on a rights issue, when the new shares are offered on, say, a 15 to 20pct discount to the prevailing share price.
[3] Hybrid bonds typically are issued as loan capital, but the issuer retains the right to exchange or convert the bonds into convertible preference shares with similar conversion rights and income.
[3] Subordination of convertible debt is often regarded as an acceptable risk by investors if the conversion rights are attractive by way of compensation.
[3] There is no three-month conversion period for investors following the date that bonds called are due for redemption, (as is otherwise required, under French law, for French convertibles).
[3] Contingent convertibles (co-co) only allow the investor to convert into stock if the price of the stock is a certain percentage above the conversion price.
[3] The conversion price a company fixes on a convertible can be higher than the level that the share price ever reached recently.
[3] The pro-forma fully-diluted earnings per share shows none of the extra cost of servicing the convertible up to the conversion day irrespective of whether the coupon was 10pct or 15pct.
[3] Mandatory convertibles are short duration securities"generally with yields higher than found on the underlying common shares " that are mandatorily convertible upon maturity into a fixed number of common shares.
[3] Valuing a convertible requires an assumption of 1) the underlying stock volatility to value the option and 2) the credit spread for the fixed income portion that takes into account the firm's credit profile and the ranking of the convertible within the capital structure.
[3] Reverse convertibles securities are most commonly targeted towards the U.S. market. Their investment value is derived from underlying equity exposure, which is paid in the form of fixed coupons.
[3] The price will substantially reflect (1) the value of the underlying shares, (2) the discounted gross income advantage of the convertible over the underlying shares, plus (3) some figure for the embedded optionality of the bond.
[3] In theory, the market price of a convertible debenture should never drop below its intrinsic value.
[3] Using the market price of the convertible, one can determine the implied volatility (using the assumed spread) or implied spread (using the assumed volatility). This volatility/credit dichotomy is the standard practice for valuing convertibles.
[3] In the case of exchangeables, the credit quality of the issuer may be decoupled from the volatility of the underlying shares. The true artists of convertibles and exchangeables are the people who know how to play this balancing act.
[3] What makes convertibles so interesting is that, except in the case of exchangeables (see above), one cannot entirely separate the volatility from the credit.
[3] The SPV debt is convertible (exchangeable to be more precise) into the equity of the parent company, which is often a holding company.
[3] Convertibles can be used to increase the total amount of debt a company has in issue.
[3] The basis of seniority upon which money raised by the issuing entity has been onwardly applied is rarely revealed at issue; if on-lent on a subordinated basis, the asset quality of the issuing entity and its debt is impaired. This creates a fundamental weakness in the credit analysis of any convertible and non-convertible SPV debt.
[3] For a finance director watching the trend in interest rates, there is an attraction in trying to catch the lowest point in the cycle to fund with fixed rate debt, or swap variable rate bank borrowings for fixed rate convertible borrowing.
[3] Even if the fixed market turns, it may still be possible for a company to borrow via a convertible carrying a lower coupon than ever would have been possible with straight debt funding.
[3] The bidder can offer a higher income on a convertible that the dividend yield on a bid victim"s shares, without having to raise the dividend yield on all the bidder"s shares. This eases the process for a bidder with low-yield shares acquiring a company with higher-yielding shares.
[3] Reverse convertible securities are short-term coupon-bearing notes, structured to provide enhanced yield while participating in certain equity-like risks.
[3] Convertibles can provide additional funding when the straight debt "window" may not be open.
[3] In some countries (such as Finland) convertibles of various structures may be treated as equity by the local accounting profession. In such circumstances, the accounting treatment may result in less pro-forma debt than if straight debt was used as takeover currency or to fund an acquisition.
[3] In the UK the predecessor to the International Accountancy Standards Board (IASB) put a stop to treating convertible preference shares as equity. Instead it has to be classified both as (1) preference capital and as (2) convertible as well.
[3] However convertible preference shares typically carry voting rights when preference dividends are in arrears.
[3] None of the (possibly substantial) preference dividend cost incurred when servicing a convertible preference share is visible in the pro-forma consolidated pretax profits statement.
[3] A contingent convertible with a $10 stock price at issue, 30% conversion premium and a contingent conversion trigger of 120%, can be converted (at $13) only if the stock trades above $15.60 ($13 x 120%) over a specified period, often 20 out of 30 days before the end of the quarter.
[3] Of course, the bigger voting impact occurs if the issuer decides to issue an exchangeable rather than a convertible.
[3] Vanilla convertible bonds are bonds which may be converted at the option of the owner into the shares of the issuer, usually at a pre-determined rate. They may or may not be redeemable by the issuer prior to the final maturity date, subject to certain share price performance conditions. Exchangeables ( XB ) are bonds which may be exchanged into shares other than those of the issuer. Strictly speaking, they are not convertibles, but they share certain common evaluation characteristics.
[3] Non-co-co convertible bonds result in an immediate increase in diluted shares outstanding, thereby reducing the EPS. The impact to diluted shares outstanding is calculated using the "as-if-converted" method, which requires the most conservative EPS value be used. Recent changes to GAAP have eliminated the favorable treatment of co-co's, and as a result their popularity with issuers has waned.
[3] Convertible bonds are safer than preferred or common shares for the investor. They provide asset protection, because the value of the convertible bond will only fall to the value of the bond floor.
[3] In finance, a convertible bond (or convertible debenture) is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features.
[3] Conversion ratio: The number of shares each convertible bond converts into. It may be expressed per bond or on a per centum (per 100) basis.
[3] Convertible bonds are usually issued offering a higher yield than obtainable on the shares into which the bonds convert.
[3] Typically, a convertible bond at issue may yield 1pct to 3pct less than what straight debt would yield.
[3] Like any typical bond, convertible bonds have an issue size, issue date, maturity date, maturity value, face value and coupon.
[3] From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. In exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.
[3] In limited circumstances, certain convertible bonds can be sold short, thus depressing the market value for a stock, and allowing the debt-holder to claim more stock with which to sell short. This is known as death spiral financing.
[3] The simultaneous purchase of convertible bonds and the short sale of the same issuer's common stock is a hedge fund strategy known as convertible arbitrage. The motivation for such a strategy is that the equity option embedded in a convertible bond is a source of cheap volatility, which can be exploited by convertible arbitrageurs.
[3] Foreigners have been able to receive interest gross on French convertibles (obligations convertibles or OCs), further blurring the differentiation between the domestic and euro CB markets. The pan-European CB market has substantially replaced the various domestic CB markets, and the driver behind this has been the ability of cross-border investors to receive interest payments gross.
[3] European domestic convertibles (such as in the UK and Italy) are dominated more by local investment institutions. Since the early nineteen-eighties, foreigners have been able to receive interest on U.S. domestic convertible bonds gross, and this has broadened the global investor base to embrace global hedge funds and other global investors.
[3] The market for convertibles is primarily pitched towards the non taxpaying investor.
[3] SPV structures Many convertibles, particularly Euroconvertibles, are issued though special purpose vehicles (SPVs), (typically a subsidiary based offshore in British Virgin Islands, the Cayman Islands or Jersey).
[3] Binomial valuations Since 1991-92, most market-makers in Europe have employed binomial models to evaluate convertibles.
[3] Effectively a high tax-paying shareholder can benefit from the company securitising gross future income on the convertible, income which it can offset against taxable profits.
[3] The perception was that gearing was less with a convertible than if straight debt was used instead.
[3] With a convertible bond, dilution of the voting rights of existing shareholders only happens on eventual conversion of the bond.
[3] Japan: In Japan, the convertible bond market is relatively more regulated than other markets. It consists of a large number of small issuers.
[3] The convertible bond markets in the United States and Japan are of primary global importance. These two domestic markets are the largest in terms of market capitalisation. USA: It is a highly liquid market compared to other domestic markets.
[3] Each domestic market within the Asian convertible bond market is at a various level of development.
[3] Compared to other global markets, European convertible bonds tend to be of high credit quality.
[3] Roof designs are highly variable from the folding textile roof, known variously as the top, soft top, ragtop or hood " to the folding multi-sectional rigid roof known as a retractable hardtop, coup" convertible or coup" cabriolet.
[2] Contemporary convertible design may include such features as electrically-heated glass rear window (for improved visibility), seat belt pre-tensioners, boron steel reinforced A-pillers, front and side airbags, and a safety cage " a horseshoe like structure around the passenger compartment and roll over protection structures or (ROPS) with pyrotechnically charged roll hoops hidden behind the rear seats that deploy under roll-over conditions whether the roof is retracted or not.
[2] Current convertibles feature windblockers of various designs including detatchable fold-up designs ( Toyota Solara ), vertically retractable glass ( Audi TT ), and carefully designed minimally designed flaps ( Mazda Miata ). Mercedes currently offers a feature to provide heated air to the neck area of the occupants of its SLK and SL models, marketed as the "Air Scarf".
[2] Modern structural design can minimize skuttle shake. The retractable hardtop solves some issues with the convertible, but has its own comprises, namely mechanical complexity, expense and reduced luggage capacity.
[2] For the bond or stock that can be converted to equity, see convertible security.
[2] A roadster may also have a soft folding top and separately installable soft "window" panels " offering little protection from inclement weather " in contrast to a convertible with glass windows.
[2] A convertible is an automotive body style with a flexibly operating roof that allows either an open-air mode or an enclosed mode.
[2] During the 80's, Jaguar produced an XJ-6C with two removable panels over the front seats and a partial fold-down convertible section in the back. Citroen currently markets the Citro"n C3 Pluriel, which can be configured as a full or partial convertible or a closed car, thanks to its detachable roof bars and folding fabric roof.
[2] In the vintage car era, the convertible was the default body style. It was not until 1910 that Cadillac introduced the first closed-body car.
[2] Unusual convertibles include an early four-wheel drive AMC Eagle line with a steel targa bar, removable fiberglass roof section. In 2003 Audi offered its A4 Cabriolet with all-wheel drive.
[2] During the 1950s and 1960s, convertibles were available from automakers in the U.S. in a broad variety of models and trim levels. Most often they were the prestige models in their respective line, such as the Packard Caribbean, Oldsmobile 98, or the Imperial by Chrysler.
[2] Convertibles are usually 2-door models, with far fewer 4-door models exist e.g. the 1960s Lincoln Continental.
[2] Mazda pioneered the windblocker with its Mazda RX7 convertible -- also the first textile convertible top to be manufactured on its own assembly line and dropped into place during assembly as a single unit.
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