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Mandatory convertible
A debt instrument that the holder is required to convert into common shares of the issuer at maturity even if the debt instrument provides a higher yield than that of the underlying common shares, the issuer being required to proceed with a share issue at maturity for repayment.
Two common types of mandatory convertibles are equity contract notes and equity commitment notes. The first are notes exchangeable at maturity for a number of shares whose market value corresponds to the value of the bond principal. At maturity, if the holder refuses repayment in shares, the issuer sells them on behalf of the holder. If the issuer cannot sell the shares, the holder is required to take delivery of the shares. Equity commitment notes are more in the nature of convertible debt instruments since the holder is not required to take delivery of the issuer's shares. However, the issuer commits to repay the instruments at maturity using the proceeds of a future share issue.
Translations
Synonyms and variations
- Equity commitment notes
- Equity contract notes
- Equity note