Convertible and exchangeable securities
Convertible and exchangeable securities

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Convertible and exchangeable securities
  • What are convertible and exchangeable securities?
  • Why issue convertible and exchangeable securities?
  • Why invest in convertible and exchangeable securities?
  • Documenting and issuing a convertible or exchangeable security
  • Share allocation on conversion and exchange
  • Conversion or exchange period
  • Conversion or exchange by trustee
  • Convertible securities
  • Exchangeable securities
  • More...

What are convertible and exchangeable securities?

Convertible and exchangeable securities are types of equity-linked debt securities. They confer a right on the investor to convert its debt into equity (ie shares) of the issuer or to exchange its debt for equity in another company. This Practice Note deals mainly with transactions where both the securities and the exchange or conversion shares are tradeable and listed.

They are also called 'hybrid securities' because they share characteristics of both debt and equity (see Debt securities and equity compared).

The main difference between a convertible security and an exchangeable security is:

  1. convertible securities give the investor the right to convert its debt into new equity of the issuer or a group company, or sometimes into existing shares in the issuer which the issuer holds itself (treasury shares), whereas

  2. exchangeable securities give the investor the right to exchange its debt for existing shares held by the issuer in a third party

The issuer is usually also entitled to elect to pay a cash amount (the cash alternative) instead of delivering shares upon the exercise of conversion or exchange rights. The cash alternative is equal to the market value of the shares which would otherwise have been delivered to the holders of the debt securities.

The holder's right to convert or exchange the security into shares or to receive the cash alternative is effectively

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