Bond Type: Exchangeable Bonds

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This kind of bonds is a relatively new concept whereby issuers will exchange the bonds with shares from another company. An example is the Berjaya Holdings which issued exchangeable bonds to be exchanged for Berjaya Sports Toto shares.

The motivation behind issuing such a facility is to piggy-back on the share price performance of the other company. If planned correctly, issuer need not pay back the bonds as bond holders will see better value in exchanging it into shares than redeeming it at nominal or face value.

The risks to both issuers as well as the bond holders are as follows:

1.For the issuer, it must have the shares in the target company before issuing such a bond.

 

2.Issuer may dilute its holdings in the target company is bond holders exercise their rights to exchange. 

 

3.As the reference asset is not the issuer, the issuer may not have control over the whole life of the bonds.

 

4.Due to the convertibility factor, an overestimation of the company’s share price performance may caused the investors to overpay for the bonds.

 

5.The volatility of the equity markets can caused similar volatility in the shares of the bonds.