Convertible bond

A convertible (also convertible bond, convertible bond, Eng. Convertible bond ) is a signal output from a share company and usually equipped with a nominal interest rate interest-bearing securities, which the owner grants the right to exchange it during a conversion period at a predetermined ratio into shares.

Background

Since convertibles include the right or the obligation to exchange the bond for shares of the issuer is initially an appropriate decision on creation of the conditional capital required by the General Meeting of the Share Company, are taken from the in converting the corresponding shares.

The nominal interest rate, with a convertible bond has, usually located under the respective interest of the capital market. The issue requires a shareholders' resolution three-quarters majority. The shareholders therefore have a statutory subscription right. To compensate for the price difference for the company's shares a conversion or exchange ratio is fixed. Unconverted Notes will be redeemed at the end of the term, unless the convertible bond conditions a conversion obligation is fixed. Such convertible bonds are compulsorily converted at the end of the term.

If the issuer of a convertible bond is not the same corporation, the shares of which serve as the base value for the convertible bond, so one does not speak of a convertible, but of an exchangeable bond.

It occasionally happens that a large shareholder wants to separate (eg the state) of shares in a company, but does not want to make a direct placement of shares on a stock exchange, but by the laying of a convertible bond.

In contrast to option bonds, in a convertible bond can not be separated from the bond and traded separately the Wandelungsoption.

Advantages and disadvantages of the issuer

Advantages for the issuer:

• Purchase stimulus for investors through exchange law, therefore usually a good accommodation for the bonds is possible.
• The AG achieved through the issue of convertible bonds for debt financing at very favorable conditions (eg, only 2.125% nominal interest rate and 100% deposit, rather than a sub- par - emission).
• Only the non-converted replaced part of the convertible bonds must be repaid. Debt is to equity.
• Interest rates reduce the taxable profit

Disadvantages to the issuer:

• Uncertainty about the extent of the real capital
• Under certain circumstances, issue of shares under value at unexpected performance

Pros and Cons for Investors

Benefits for Investors:

• Combination of fixed income to the exchange and dividend after conversion
• A rising stock price leads to a corresponding rise in the convertible bond.
• Losses are generally secured by the repayment claim at face value, as long as the issuer has no mandatory conversion reserved.
• Possible exchange earnings by correspondingly high market value of the shares at the conversion date.

Disadvantages for the investor:

• Lower interest rates than normal corporate bonds
• When convertible bonds with conversion obligation, it may, by fallen prices of the shares and the resulting difference between price and the notional principal amount at issuance of the bond, lead to considerable losses on the part of the investor.
• Does the corporation prior to the rescission of a capital increase, it can come to the holder of the convertible bond to strong equity dilution if no anti-dilution clauses are agreed in the loan terms.

German law

Under the name of convertible bond will be in § 221 of the German Stock Corporation Act, the legal framework for the issuance of a convertible bond by a corporation with the right to convert into shares this same corporation ( only " own shares ", so according to prevailing opinion, even if this is not literally in the law is described ). If you connect this definition to apply only requires that convertible bond convertible bond is the same, which can in general allow for a change in any shares.

Especially critical for the issuance of convertible bonds, the decisions on the conditional capital, as they are absolutely necessary, but under appeal in the news recently by shareholders. Since the decision often takes place long before the actual emission, is then often argued by the Anfechtern that the circumstances have changed significantly by a strong rise or fallen stock price, for example, so that the time granted permission to present opinions no longer sufficiently sufficient. As yet no new market standard has been established due to this issue, some issuers make do with the creation of new authorizations or with "old" appropriations ( > 3 years), which could not be successfully challenged before.

Mandatory convertible

A mandatory convertible notes (English mandatory convertible security ( MCS) ) is a particular variant of the normal bond, in which the rights of investors are restricted. While investors in a conventional convertible to maturity has the choice whether he converts them into shares or not, at a mandatory convertible bond, the conversion into shares no later than the end of the term is mandatory. This bear investors a higher risk to suffer in the case of falling prices even yield losses. It therefore has the character of a bond that pays a coupon during the term, however, is to be repaid by the end of new shares.

Accordance with the mandatory conversion into shares, which is conducted through the issue of new shares, the mandatory convertible indirect capital with associated dilution effect, but because these but extends over a comparatively long period of time and only at second glance it is apparent finds this type of capital in the public far less attention.

During the crisis years 2000 to 2003 a number of large companies (eg Alcatel, Credit Suisse, German Telekom AG, France Telecom and Vivendi ) have issued mandatory convertible notes, these were the exception rather than the rule at the beginning of 2008. The end of 2008 drew the Switzerland of UBS mandatory convertible notes over six billion Swiss francs to furnish the bank because of the financial crisis in 2008 with additional equity. The term was applied to 30 months and the maximum number of shares to be output has been limited to 365 million shares.

It is in CoCo- Bonds are essentially bonds that should be falling equity ratio below a certain value are automatically converted into shares of the issuer.

The demand for CoCo- Bonds is created in the years of the financial crisis in 2007, as the bondholders no part contributed to the damage than the high bankruptcy risk banks received State aid. They have continued to receive their interest and they knew after the rescue with certainty that the issuers of their bonds were too big to fail. There must maintain a certain ratio of equity capital through the capital rules for financial institutions each bank, you want to accomplish this in the future by CoCo- Bonds. Since CoCo bonds but also bring a higher risk of loss, the interest rate will be higher, which makes them expensive as capitalization instrument.