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This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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What is a Mandatory Convertible Bond?

What is a Mandatory Convertible Bond?

James Eves

30 years: Equity capital markets

James delves into mandatory convertibles and their unique structure compared to standard convertibles. He dives into Bayer’s issuance in 2016 in part of its financing of acquiring Monsanto.

James delves into mandatory convertibles and their unique structure compared to standard convertibles. He dives into Bayer’s issuance in 2016 in part of its financing of acquiring Monsanto.

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What is a Mandatory Convertible Bond?

3 mins 15 secs

Overview

Mandatory convertibles differ from regular convertibles as it behaves more like equity than a bond. An issuance of a mandatory shows the company is confident its share price will rise.

Key learning objectives:

  • Understand mandatory convertibles and how they differ from regular convertibles

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Summary

What is a mandatory convertible?

A mandatory convertible is an instrument that turns into equity at maturity – whether the shares have traded up or down. This clearly has a very different structure to a convertible - which behaves like a bond on the downside and like equity on the upside. A typical mandatory has a 3-year maturity. It delivers 1 share if the share price at maturity is at or below the share price when launched – so effectively, exactly like owning equity for investors. If the share price is higher though, the instrument is settled with fewer shares until a limit (or premium) is reached, for example, 20-25% above the original share price, above which investors again receive a fixed number of shares.

If the premium is set at 25%, then above this level investors will receive 0.8 shares. At or below the original share price investors receive 1 share. Between the original price and the 25% premium they receive a reduced number of shares from 1 to 0.8. As a result, on the upside, investors get a return that is worse than holding straight equity. To compensate for this loss, mandatories have a coupon that is well above the dividend yield.

Why would an issuer sell mandatory convertibles instead of equity?

Mandatories were introduced as a way of selling equity initially for companies with low dividend yields to equity income funds. For example, if an income fund has to buy companies with dividend yields over 3%, then it will not have exposure to some sectors. However, by issuing a mandatory with the higher yield, they can buy exposure to these companies’ shares. Over time the market has expanded, with many hedge funds also buying the product.  

For issuers this is an instrument much closer to equity – it is generally not treated as debt. Also, it signals that the company is confident the share price will rise. They are sometimes done in conjunction with straight equity – which will hopefully increase the demand for what is effectively more equity, by creating additional demand from different equity-income funds and equity-linked investors.

What is an example of a mandatory convertible?

A good example of a mandatory is the €4bn issue from Bayer in late 2016, as part of its financing of its $66bn acquisition of Monsanto. The mandatory was an early part of the refinancing of the bank debt that had been put in place for the acquisition. When launched, investors also knew that a large rights issue (ultimately €6bn) would follow, as well as many other debt instruments and disposals. The instrument had a 3-year maturity and was launched with a 5.125% to 5.625% coupon range and 20% to 25% premium range. The issue was priced at the ‘best’ end for investors with a 5.625% coupon and 20% premium, although this was not unexpected as it was Europe’s largest-ever mandatory convertible.

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James Eves

James Eves

Career banker with over 25 years working in investment banking. James has worked in many aspects of banking including equity capital markets, origination, IPOs and hybrid capital.

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