Convertible bond

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A convertible bond (including convertible bonds , convertible bond ., English convertible bond ) is an output from a share company and usually with a nominal interest rate equipped bonds that grant the holder the right to them during a conversion period at a predetermined ratio in share exchange; otherwise the bond is due for repayment at the end of the term . If that option is with the corporation and not the holder, it is known as a reverse convertible .


Since convertible bonds contain the right or the obligation to exchange the bond for shares in the issuer, the general meeting of the respective stock corporation must first make a corresponding resolution to create the conditional capital , from which the corresponding shares are taken upon conversion.

The nominal interest rate with which a convertible bond is equipped is mostly below the respective interest rate on the capital market. The issue requires a shareholders' meeting resolution with a three-quarters majority. The shareholders therefore have a statutory subscription right. A conversion or exchange ratio is set to compensate for the price difference to the company's share. Unconverted bonds will be redeemed at the end of the term, unless a conversion obligation is specified in the convertible bond conditions. Such convertible bonds are converted at the end of the term.

If the issuer of a convertible bond is not identical to the stock corporation whose shares serve as the base value for the convertible bond, one does not speak of a convertible bond, but of an exchangeable bond .

Occasionally it happens that a major shareholder (e.g. the state ) wants to part with shares in a company , but does not want to do so by placing the shares directly on a stock exchange , but by issuing a convertible bond.

In contrast to bonds with warrants , the conversion option of a convertible bond cannot be separated from the bond and traded separately.

Advantages and disadvantages for the issuer

Benefits for the issuer

  • Purchase incentive for investors through conversion rights, so a good placement of the bond is usually possible.
  • By issuing convertible bonds, the AG achieves outside financing at particularly favorable conditions (e.g. only 2.125% nominal interest and 100% payment, instead of a below par issue).
  • Only the part of the convertible bonds that has not been exchanged has to be redeemed. Debt becomes equity.
  • Interest reduces the taxable profit

Disadvantages for the issuer

  • Uncertainty about the extent of the real capital increase
  • Under certain circumstances, shares may be issued below value in the event of an unexpected price development

Advantages and disadvantages for the investor

Advantages for the investor

  • Combination of fixed income up to conversion and dividend after conversion
  • A rising share price also leads to a corresponding rise in the price of the convertible bond.
  • Price losses are generally covered by the repayment claim at nominal value, as long as the issuer has not reserved the right to conversion.
  • Possible exchange profit due to the correspondingly high market value of the shares at the time of exchange.

Disadvantages for the investor

  • Lower interest rates than normal corporate bonds
  • In the case of convertible bonds with conversion obligation, the falling share price and the resulting difference between the price and the arithmetical nominal amount when the bond is issued can lead to considerable losses for the investor.
  • If the stock corporation carries out a capital increase before the conversion , the owner of the convertible bond can experience severe capital dilution if no anti-dilution clauses have been agreed in the bond conditions.
  • Compared to the purchase of the corresponding base value, the investor misses out on possible dividend payments (at least until the time of conversion into the base value, i.e. the share).

German law

Under the name convertible bond, § 221 of the Stock Corporation Act describes the legal framework for the issue of a convertible bond by a stock corporation with the right to convert into shares of this stock corporation (only "own shares"; according to the prevailing opinion , even if this is not literally stated in the law) described. If you agree with this definition, it only applies to a limited extent that convertible bonds are convertible bonds that can generally allow conversion into any number of shares.

The resolutions on conditional capital are particularly critical when issuing convertible bonds , as these are absolutely necessary, but have recently been increasingly challenged by shareholders. Since the decision is often made long before the actual issue, the contestants often argue that the circumstances are e.g. B. have changed sharply due to a sharp rise or fall in the share price, so that the approval granted at the time no longer satisfies the current opinions. Since no new market standard has yet been established with regard to this problem, some issuers make do with the creation of new authorizations or with "old" authorizations (> 3 years) that have not yet been successfully challenged.

Special forms of convertible bonds

Exchangeable bond

In the exchangeable bond ( exchangeables ) the option is not exchanged for shares of the issuer, but a third company.

Mandatory convertible bond, mandatory convertible bond

A mandatory convertible security (MCS) is a special variant of the normal convertible bond in which the rights of investors are restricted. While the investor can choose whether to convert a conventional convertible bond into shares or not until the end of the term, in the case of a mandatory convertible bond, conversion into shares is mandatory at the end of the term at the latest. As a result, investors bear a higher risk of losing returns themselves in the event of falling prices. It thus has the character of a bond that pays a coupon during the term , but is redeemed at the end with new shares at the latest .

Due to the mandatory conversion into shares, which is carried out through the issue of new shares, the mandatory convertible bond represents an indirect capital increase with an associated dilution effect . However, since this extends over a comparatively long period and is only apparent at second glance, this type of Capital increase in the public so far less attention.

While a number of large companies (including Alcatel , Credit Suisse , Deutsche Telekom AG , France Telecom and Vivendi ) issued mandatory convertible bonds in the crisis years 2000 to 2003 , these were more the exception than the rule at the beginning of 2008. At the end of 2008, Switzerland signed a mandatory convertible bond from UBS for six billion francs in order to provide the bank with additional equity due to the financial crisis around 2008. The term was set for 30 months and the maximum number of shares to be issued was limited to 365 million shares.

Conditional mandatory convertible bond (Coco bond)

It is in Coco bonds to bonds , the predefined when entering events - such as falling below a threshold value for the equity ratio - automatically into shares of the issuer are converted.

The demand for Coco bonds arose in the years of the financial crisis from 2007 onwards, because the bond owners did not take part in the damage when the banks, which were in danger of going bankrupt, received state aid. They continued to draw their interest and after the rescue they knew for sure that the issuers of their bonds were systemically important (“ Too Big to Fail ”). Since the equity rules for financial institutions mean that every bank has to hold a certain quota of equity, one wants to accomplish this in the future with Coco bonds. Since Coco bonds also entail a higher risk of loss, the interest rate is higher, which makes them expensive as a capitalization instrument.

Reverse Convertible

In addition to the creditors of the bond, the issuing company may also have the right to decide on the exercise. This was originally achieved in spite of the lack of an express provision in the Stock Corporation Act through an obligation of the obligee upon subscription to exercise his conversion right based on a decision of the company. Since the stock corporation law amendment 2016 , which mostly came into force on December 31, 2015 , this form of convertible bond has been expressly permitted in Section 221 (1 ) AktG .

See also

Web links

Wiktionary: convertible bond  - explanations of meanings, word origins, synonyms, translations

Individual evidence

  1. Hans Paul Becker: Investment and Financing, Fundamentals of Operational Finance , 6th Edition, Wiesbaden, Springer Gabler Verlag, 2013, p. 232.
  2. Roger Zantow, Josef Dinauer: finance company, the foundations of modern financial management , 4th revised edition, Munich, Pearson Education Publishing, 2016, pp 258th
  3. Mandatory convertible bonds: motives for action, share price reaction and rating  ( page no longer available , search in web archivesInfo: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.@1@ 2Template: Dead Link /  
  4. November 27, 2008: UBS shareholders clear the way for the rescue package
  5. v. Dryander / Niggemann in Hölters, AktG, 2nd edition 2014, § 192 Rn. 25 a.
  6. Nikolaos Paschos, Sebastian Goslar: “Die Aktienrechtsnovelle 2016 - An Overview.” In: NJW 2016, pp. 359–364.