Convertible Bond Markets
Earlier market survey, useful on the pre-2000 issuance regime.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Philips wrote a practitioner treatment of convertible bond markets. The reference has not verified the book's detailed contents.
The subject is a security that combines a bond with an option to convert into the issuer's equity. This produces a specific set of analytical requirements. The instrument's value depends on the bond floor, meaning what it is worth as straight debt given the issuer's credit; on the conversion value, meaning the market value of the shares it converts into; and on the option value arising from the possibility that the share price rises. The relationship between these produces the characteristic asymmetric profile: participation in equity upside with the bond floor limiting the downside, which is what makes the instrument attractive to buyers.
The issuer's perspective is the mirror image. A convertible allows a company to issue debt at a lower coupon than straight debt would require, because the holder is paying for the option, and to sell equity at an effective price above the current market if conversion occurs. Companies whose credit is weak or whose share price is volatile find convertibles available when straight debt or equity is not.
The analytical territory includes valuation using option pricing adapted for credit risk, the call provisions that let issuers force conversion, the put provisions that let holders demand repayment, dilution calculations, and the market conventions in different jurisdictions, since European, Japanese and American convertible markets have developed different structures.
Readers should verify the book's specific coverage and note that it is from 1997, so market conventions and the instruments in use have developed since.
Key takeaways 7
- A convertible's value combines a bond floor set by the issuer's credit with an option to convert into equity.
- The instrument offers equity upside participation with downside limited by the bond floor, which is why buyers accept the low coupon.
- An issuer sells the conversion option in exchange for a lower coupon than straight debt would require.
- Convertibles are available to issuers whose credit is weak or whose shares are volatile when straight debt or equity is not.
- Issuer call provisions allow companies to force conversion once the share price has risen sufficiently.
- Valuing a convertible requires adapting option pricing for credit risk, since the bond floor moves with the issuer's condition.
- Convertible market conventions differ substantially between American, European and Japanese markets.
Who should read it
Practitioners entering convertible markets who need the instrument mechanics, verified against current market conventions.
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Where it sits in the reference 1
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