Equity-Linked Instruments
What is it?
Equity-linked instruments include convertible bonds, exchangeable bonds, preferred shares.
Convertible Bond is a bond with fixed maturity (with exception of perpetual bonds), principal amount, coupon payment(s), and also provides to the bondholders the option to convert into new or existing shares of the issuer during the life of the bond at a pre-determined conversion price, usually at a premium to the spot price. If conversion does not occur, the bond is redeemed at maturity.
Exchangeable Bond similarly has an embedded option that provides bondholders with the right to exchange the bond into existing shares of a listed company other than the issuer.
Preferred shares are issued with additional or guaranteed dividend and/or liquidation share (subject to certain legal conditions). They are senior to common shares and subordinate to bonds in terms of claims or rights on a share of the company's assets. They usually do not carry voting rights. They may be convertible into a pre-defined number of common shares at any time until a pre-set period (one-way deal) or mandatory convertible at the end of their life.
Advantages
- Opportunity to acquire equity or equity-like financing in a difficult market situation which limits placement of pure equity
- Allows payment in arrears (cumulative payment)
- Source of funding share buyback, M&A
- Unsecured instrumentpotentially strengthening the equity of the issuer in the medium-term; provides more flexibility
Whom is it for?
Mainly listed entities. Public companies with sound market reputation and liquid shares or prospective corporates at a pre IPO stage.
Underlying shares: Listed entity with sizeable market cap and stable daily trading liquidity.
Frequently Asked Questions
When placement of a pure equity is challenging due to difficult market environment preferred stock may appear more lucrative to investors. In the long-term strengthens the equity profile of the company.
Provides equity financing without immediate dilution. Compared to bonds, it has positive impact on the equity position of the company and does not require collateral.
Usually the preferred shares are issued without voting rights. Public companies are not allowed to issue preferred shares providing disproportionate voting right or additional liquidation share.