Convertible Bond Adjustment Calculations
Mark Dalton
20 years: Equity capital markets
In the first of this two part series, Mark uses his experience as a calculation agent to provide insight into how the role helps both issuers and investors to understand how calculations impact them. He delves into adjusting the conversion price when an issuer has convertible bonds outstanding and is due to pay a dividend, as well as dealing with cash settlement conversions.
In the first of this two part series, Mark uses his experience as a calculation agent to provide insight into how the role helps both issuers and investors to understand how calculations impact them. He delves into adjusting the conversion price when an issuer has convertible bonds outstanding and is due to pay a dividend, as well as dealing with cash settlement conversions.
Convertible Bond Adjustment Calculations
5 mins 5 secs
The calculation agent is responsible for carrying out the calculations set out in the terms and conditions of the transactions. The role of a calculation agent is to be able to help the issuers and investors understand how those calculations affect them.
Key learning objectives:
Understand how a Calculation Agent helps its clients
Understand how an issuer settle convertible bonds after the investor converts it
Describe the Net Share Settlement
What are the tasks performed by a Calculation Agent?
- They determine the prevailing share price, as defined in the terms and conditions of the bonds – usually, though not always, this is the average of five daily VWAPs
- They apply relevant formulas in the terms and conditions to reduce the conversion price by the same percentage as either the full amount of the dividend, or the excess dividend over some base amount, expressed as a percentage of that share price
What are the two most common ways for an issuer to settle convertible bonds?
- The first, and easiest one, is for the issuer to simply deliver a number of shares equal to the amount of the bonds converted, divided by the conversion price
- Net Share Settlement - the issuer has to deliver an amount of cash equal to the par value of the bonds, plus a number of shares calculated by deducting the value of that cash repayment from the value of the total number of shares over a forward-looking averaging period, in the same way as for a cash settled conversion
For an issuer, having a good calculation agent means that they can rely on the overview numbers given to them and concentrate on the settlement process rather than the calculations.
Mark Dalton
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