What Is Exchangeable Debt?

An exchangeable debt is a type of hybrid debt security that can be converted into the shares of a company other than the issuing company (usually a 澳洲幸运5官方开奖结果体彩网:subsidiary). Companies issue exchangeable debt for a number of reasons, including tax savings and divesting a 🌜large stake i🦂n another company or subsidiary.

Understanding Exchangeable Debt

澳洲幸运5官方开奖结果体彩网:Straight debt can be defined as a bond that does not give the investor the option to convert into equity of a company. Since these investors do not get to participate in any price appreciation in the shares of a company, the yield on these bonds is typically higher than a bond with an 澳洲幸运5官方开奖结果体彩网:embedded option to convert. O🦋ne type of bond that has a convertibility feature is the exchangeable debt.

An exchangeable debt is simply a straight bond plus an embedded option which gi🔥ves the bondh🐭older the right to convert its debt security into the equity of a company that is not the debt issuer.

Most of 🦋the time, the underlying company is a subsidiary of the company that issued the exchangeabღle debt. The exchange must be done at a predetermined time and under specific conditions outlined at the time of issuance.

In an exchangeable debt offering, the terms of the issue, such as the 澳洲幸运5官方开奖结果体彩网:conversion price, the number of shares into which the debt instrument can be converted (澳洲幸运5官方开奖结果体彩网:conversion ratio), and the debt maturity are specified in the bond indenture at the time of issueꦆ.

Because of the exchange provision, exchangeable debt generally carries a lower 澳洲幸运5官方开奖结果体彩网:coupon rate and offers a lower yield than comparable st💖raight d🎐ebt, as is the case with convertible debt.

Exchangeable Debt vs. Convertible Debt

Exchangeable debt is quite similar to 澳洲幸运5官方开奖结果体彩网:convertible debt, the major difference being that the latter is converted into shares of the underlying issuer rather than shares of a subsidiary, as is the case w♏ith exchangeable debt.

In other words, the payoff of exchangeable debt depends on the performance of a separate company, while the payoff of 🌱convertible debt depends on the performance of the issuing company.

An issuer 澳洲幸运5官方开奖结果体彩网:decides when an exchangea♐ble bond i꧑s exchanged for shares or other debt securitie𝓰s, whereas with a convert♛ible debt, the bond is converted into shares or cash when the bond matures.

Valuing Exchangeable Debt

The price of an exchangeable debt is the price of a straight bond plus the value of the embedded option to exchange. Thus, the price of an exchangeable debt is always higher than the price of a straight debt given that the option is an added va🌠lue to an investor’s holding.

The 澳洲幸运5官方开奖结果体彩网:conversion parity of an exchangeable bond is the value of the shares that can be converted as a result of exercising a 澳洲幸运5官方开奖结果体彩网:call option on the underlying stock. Depending on the parity at the time of exchange, investors determine whether converting exchangeable bonds into underlying shares would be more profitable than having the bonds redeemed at maturity for interest and 澳洲幸运5官方开奖结果体彩网:par value.

Divesting With Exchangeable Debt

A company that wants to divest or sell a large percentage of its holdings in another company can do so through exchangeable debt. A company selling of🎃f its shares hastily in another company may be viewed negatively in the market as a signal of financial health deterioration.

Also, raising an equity issue may result in the undervaluation of the newly issued shares. Therefore, divesting using bonds with an exchangeable option may serve as a more beneficial alternative for issuers. Until the exchangeable debt matures, the holding company or issuer is still entitled to the dividend payments of the underlying company.