Financial Markets Operations Management (41 page)

Convertible bonds are bonds that are issued by corporations and that can be converted to shares in the issuing company at the bondholder's discretion. Convertible bonds typically offer higher yields than ordinary shares, but lower yields than straight bonds. Most convertible bonds are callable by the bond issuer either on or before a contractual conversion date.

Otherwise, a conversion will be a voluntary event when the investor decides to convert. (In contrast, if the convertible bond was called by the issuer, then this would be a mandatory event.)

The full characteristics and features of any convertible bond will be held within the securities database.
Table 11.19
shows an example of the key conversion features of a convertible bond.

The conversion right is an optional event type for the bondholder and, as you will observe, the bond may be converted at any time between the two dates mentioned. Should the investor choose to convert the bond on any day other than one of the two coupon payment dates, any accrued interest will be lost.

The terms and conditions for this bond state the means by which the bond must be presented to the conversion agent and any accompanying documentation. Any costs associated with this conversion are for the account of the bondholder.

With this particular bond issue, the conversion price could have been subjected to adjustment if certain events had occurred, including:

1. A free distribution of shares (e.g. a stock dividend);
   
2. A subdivision or consolidation of shares;
   
3. An offer of rights or warrants to existing shareholders;
   
4. An issue of other securities convertible into shares.
   

Not only was this convertible bond potentially subject to adjustments, but also the convertible bond was callable by the bank on or after 30 September 1988 during the 12-month period commencing 30 September in any of the years shown in
Table 11.20
.

A capitalisation issue occurs when a company wishes to convert some or all of its reserves into share capital. To do this, the company creates new shares and gives them to existing shareholders in a particular ratio. This ratio is calculated depending on the number of existing shares and the number of new shares, as the following example illustrates:

A bonus issue is a mandatory event and is announced; it is therefore important that information about this event is received either directly from the issuer or from the investor's custodian. In the event that the Bonus Issue is not noticed, the sudden drop in share price, as we saw with the RBS group event, should certainly put the corporate action staff on alert that something has happened to the shares.

The new shares would usually rank
pari passu
⁷
with the existing shares and therefore the new shares can be added to the existing position.

When a company wishes to raise fresh capital, it has a number of choices including a secondary issue of shares (
rights issue
). With a rights issue, the company offers its current shareholders the right to buy new shares in the company at a price discounted to the market price. This corporate actions event can be classified as being “voluntary” and “optional”. This makes it a particularly risky type from an operational point of view and great care must be taken to ensure that communications and processing are absolutely accurate and timely.

Some reasons as to why rights issues can be so problematic are listed in
Table 11.22
.

Let us consider an example of a recent rights issue – Barclays Bank plc. In July 2013, Barclays Bank plc. announced its intention to raise around GBP 5.8 billion by way of a rights issue to be launched in September 2013. The basic terms of the issue were as follows:

• Ex-entitlement date: 18 September 2013
  
• Basis of entitlement: One new ordinary share (nil paid) for four existing ordinary shares held
  
• Cost of subscription: 185p per share
  

Listed in
Table 11.23
are the key dates, commencing with the record date and ending with the posting of share certificates for those shareholders who preferred their shares to be in certificated form.

(It should be noted that market convention in terms of terminology can differ between markets. These differences will be annotated in the list of key dates with explanations after this.)