A convertible debenture is a type of hybrid security simply due to the reason that it carries both the characteristics of equity and debt. Generally, a convertible debenture offers a small coupon rate or rate of interest. However, the debenture holder is counterbalanced in that he is able to exchange or substitute the bond with common stocks, normally at a higher premium to the market price of the share.
Similar to any types of bonds, the convertible debentures have face value, issue date, issue size, coupon, maturity value and maturity date.
Following are the features of convertible debentures:
- Conversion ratio: It refers to the number of shares every convertible debenture is exchanged into. It can be represented on the basis of per centum (or per 100) or per debenture.
- Conversion price: The face value per share on which the conversion is carried out
- Conversion premium: It denotes the difference between the parity value of the convertible debenture and the market value of the convertible debenture
- Conversion value or parity value: Conversion ratio * equity price
- Call features: The issuer of convertible debenture has the option of calling a convertible debenture ahead of time (in case of specific types of debentures). However, on certain occasions, this happens according to the performances of particular stock prices. The aim behind this is to motivate the investors regarding early changeover to stocks (that has got higher value in comparison to the par value of the debenture) through forbidding cash repayment for the lesser current value.
- Exchangeables
- Contingent convertibles or co-co
- Convertible preference shares (in the United Kingdom) or convertible preference stocks
- Vanilla convertibles
- Mandatory exchangeables
- Mandatory convertibles
- OCEANES (Obligation Convertible En Actions Nouvelles ou Existantes in France)
- Reverse convertible securities
- Hybrid bonds
- Going public bonds
- SPV structures
- Locking into long-term low fixed rate borrowing
- Lesser fixed rate borrowing expenditures
- Voting dilution postponed
- Higher conversion price in comparison to a rights issue strike price
- Optimizing financing allowed according to pre-emption regulations
- Enhancing the entire degree of debt gearing
- Takeover paper
- Premium redemption convertibles
- Tax benefits
