ACCA F9考試：Convertibles and Warrants

1 Convertibles

Convertibles—bonds or preference shares which can be converted into ordinary shares.

Convertible bonds, which are usually unsecured, and convertible preference shares:

Pay fixed interest or dividend until converted.

May be converted into ordinary shares:

•on a pre-determined date;

•at a pre-determined rate; and

•at the option of the holder.

Have a conversion ratio which may change during the period of convertibility. This is often done to stimulate early conversion.

Convertibles have the following advantages:

For investors, they are a relatively low-risk investment with the opportunity to make high returns on conversion to ordinary shares.

For the issuing company, they can offer a lower rate of interest than would have to be paid on a non-convertible (straight) bond or a lower dividend rate than would be required for nonconvertible preference shares.

Convertible bonds require a "fully diluted" EPS to be calculated to indicate what EPS might be if debt is converted into equity.

The method used to find the fully diluted EPS has three steps:

1. Increase earnings by the loan interest saved, net of tax.

2. Increase the number of shares due to conversion.

3. Recalculate EPS.

2 Warrants

Warrants—rights given to investors which allow the investors to purchase new shares at a future date at a fixed price. This fixed price is also called the exercise or subscription price.

Warrants have the following features:

They are sometimes attached to bonds, to make the bonds more attractive.

They are basically options on shares.

The holder of the warrants may sell them rather than keep them.

Warrants offer several advantages for the issuing company:

The warrants do not involve the payment of any interest or dividends.

When they are initially attached to the bond, the interest rate on the bond will be lower than for comparable straight debt. This is due to the investor gaining the additional benefit of potentially being able to purchase equity shares at an attractive price.

They may make an issue of unsecured debt possible when the company's assets are inadequate to secure the debt.