Convertible Bond
The characteristic of a convertible bond
The convertible bond is one kind of equity-linked bonds. The term of the bond entitles bondholder to convert bonds into shares of the company or another company in the same group, at an agreed-upon conversion price, among a fixed period. The reason why it is made in this form is that the issuer can benefit from four aspects as follow,
(1) better terms. A convertible bond have a lower interest rate, less restrictive covenants or the subordination of bondholders' claims to those of other unsecuried creditors. As W Klein pointed out, the issuance of convertible bonds allows the company to raise money in a cheaper way while the company's appearance as a good credit risk will not be impaired.
Exception in eurobonds: it always contain a put option entitling the investor to call for repayment at certain point in order to give the investor a better rate of return. This would help to remove the risk of a fall in the value of the shares.
(2) Longer maturity. Since longer conversion period gives investors a longer time to exercise the conversion right, which makes the option worth more, therefore the company can successfully issue bonds with a longer maturity than otherwise being acceptable. A longer maturity means the company will not have the pressure on reserving a great amount of money to repay in a short period, instead they can use the money for further long-term investments. In other words, the company can borrow money for a long time but in a relatively low interest.
(3) Access to investors. Due to the back-stop protection of bonds, i.e. bonds will be repay in fixed income on due date.
(4) Deferred equity financing. Issuing convertible bonds is like the shares are paid in advance.
With the achievements above , what was loan capital now becomes equity capital so that the gearing, the ratio of the debt to equity, is improved. On the other hand, the disadvantages are thatissuer may subject to greater
The convertible bond is one kind of equity-linked bonds. The term of the bond entitles bondholder to convert bonds into shares of the company or another company in the same group, at an agreed-upon conversion price, among a fixed period. The reason why it is made in this form is that the issuer can benefit from four aspects as follow,
(1) better terms. A convertible bond have a lower interest rate, less restrictive covenants or the subordination of bondholders' claims to those of other unsecuried creditors. As W Klein pointed out, the issuance of convertible bonds allows the company to raise money in a cheaper way while the company's appearance as a good credit risk will not be impaired.
Exception in eurobonds: it always contain a put option entitling the investor to call for repayment at certain point in order to give the investor a better rate of return. This would help to remove the risk of a fall in the value of the shares.
(2) Longer maturity. Since longer conversion period gives investors a longer time to exercise the conversion right, which makes the option worth more, therefore the company can successfully issue bonds with a longer maturity than otherwise being acceptable. A longer maturity means the company will not have the pressure on reserving a great amount of money to repay in a short period, instead they can use the money for further long-term investments. In other words, the company can borrow money for a long time but in a relatively low interest.
(3) Access to investors. Due to the back-stop protection of bonds, i.e. bonds will be repay in fixed income on due date.
(4) Deferred equity financing. Issuing convertible bonds is like the shares are paid in advance.
With the achievements above , what was loan capital now becomes equity capital so that the gearing, the ratio of the debt to equity, is improved. On the other hand, the disadvantages are thatissuer may subject to greater