What Is a Compulsory Conve🔜rtible Debenture (CC🌟D)?

A compulsory convertible debenture (CCD) is a type of bond which must be converted into stock by a specified date. It is classified as a hybrid security, as it is neither purely a bond nor purely 𝄹a stock.

A 澳洲幸运5官方开奖结果体彩网:debenture is a medium- to lo🅰ng-term debt security issued by a company as a means of borrowing money at a fixed interest rate. Unlike most investment-grade corporate bonds, it is not secured by collateral. It is backed only by the full faith and credit of the issuing company.

In effect, an 澳洲幸运5官方开奖结果体彩网:unsecured corporate bond is a debenture.

Understanding the CCD

A de𒀰benture comes in two forms – non-convertible and convertible:

• A non-convertible debenture cannot be converted into equity shares of the issuing company. Instead, debenture holders receive periodic interest payments and get back their principal at the maturity date, just like most bondholders. The interest rate attached to them is higher than for convertible debentures.
• 澳洲幸运5官方开奖结果体彩网:Convertible debentures may be converted into the company’s equity after a set period of time. That convertibility is a perceived advantage, so investors are willing to accept a lower interest rate for purchasing convertible debentures.

The CCD is one form of the convertible debenture. The difference is that its owner must accept stock in the company when it matuꦇres rather than having the option of receiving stock or cash.

Debenture holders have n𓆏o rights to vote as shareholders until their debentures are converted into shares.

For companies, the compulsory conversion of debentures to equity is a way to repay a debt without spending cash. It is 澳洲幸运5官方开奖结果体彩网:payment in kind, consisting of repay🦩ment of principal a😼nd payment of interest.

The compulsory convertible debenture's 澳洲幸运5官方开奖结果体彩网:ratio of conversion is decided by the issu🦋er when the debenture is issued. The conversion ratio is the number of shares each debenture converts in to, and can be expressed per bond or on a per centum (per 100) basis.

There are two types of conversion prices. One limits the price to the equivalent of the security’s par value in shar♒es. The second al🐓lows the investor to earn more than par value.

How CCDs Are Traded

CCDs are usually considered equity, but they are structured more like debt. The investor may have a 澳洲幸运5官方开奖结果体彩网:put option which requires the issuing compaಞny to buy back shares﷽ at a fixed price.

Unlike pure debt issues, such as corporate bonds, compulsory convertible debentures do not pose a 澳洲幸运5官方开奖结果体彩网:credit risk for the company issuing them since they eventually convert t🍬o equity. CCDs also mitigate some of the downward pressure a pure equity issuance would place on the underlying stock since they are not immediately converted to shares.