Compulsory Convertible Debenture (CCD)
What Is a Compulsory Convertible Debenture (CCD)?
A compulsory convertible debenture (CCD) is a type of bond which must be changed over into stock by a predefined date. It is classified as a hybrid security, as it is neither purely a bond nor purely a stock.
A debenture is a medium-to long-term debt security issued by a company for of borrowing money at a fixed interest rate. Dissimilar to most venture grade corporate bonds, it isn't secured by collateral. It is backed exclusively by the full faith and credit of the responsible company.
In effect, a unsecured corporate bond is a debenture.
Grasping the CCD
A debenture comes in two forms - non-convertible and convertible:
- A non-convertible debenture can't be changed over into equity shares of the responsible company. All things considered, debenture holders receive periodic interest payments and get back their principal at the maturity date, just like most bondholders. The interest rate connected to them is higher than for convertible debentures.
- Convertible debentures might be changed over into the company's equity after a set period of time. That convertibility is a perceived advantage, so investors will acknowledge a lower interest rate for purchasing convertible debentures.
The CCD is one form of the convertible debenture. The difference is that its owner must acknowledge stock in the company when it develops as opposed to having the option of getting stock or cash.
Debenture holders reserve no options to vote as shareholders until their debentures are changed over into shares.
For companies, the compulsory conversion of debentures to equity is a method for repaying a debt without spending cash. It is payment in kind, comprising of repayment of principal and payment of interest.
The compulsory convertible debenture's ratio of conversion is chosen by the issuer when the debenture is issued. The conversion ratio is the number of shares every debenture changes over in to, and can be communicated per bond or on a for each centum (per 100) basis.
CCDs are hybrid securities, for certain traits of bonds and a few like stocks.
There are two types of conversion prices. One limits the price to the equivalent of the security's par value in shares. The second permits the investor to earn more than par value.
How CCDs Are Traded
CCDs are typically viewed as equity, yet they are structured more like debt. The investor might have a put option which requires the responsible company to buy back shares at a fixed price.
Not at all like pure debt issues, for example, corporate bonds, compulsory convertible debentures don't represent a credit risk for the company giving them since they at last believer to equity. CCDs likewise moderate a portion of the descending pressure a pure equity issuance would place on the underlying stock since they are not promptly changed over completely to shares.
Features
- A compulsory convertible debenture is a bond that must be changed over into stock at its maturity date.
- For investors, it offers a return in interest and, later, ownership of shares in the company.
- For companies, it takes into consideration repayment of debt without spending cash.
