Debt Exchangeable for Common Stock (DECS)

What is a Debt Exchangeable for Common Stock?

Debt exchangeable for common stock (DECS) is a debt instrument that furnishes the holder with coupon payments notwithstanding an embedded short put option and a long call on the responsible company's stock. The primary convertible security is generally a listed structured product.

Understanding Debt Exchangeable for Common Stocks (DECS)

Debt exchangeable for common stock (DECS) instruments furnish the holder with the right to convert the security into the underlying company's common stock. Preferred redeemable increased dividend equity securities (PRIDES) are one illustration of debt exchangeable for common stock and are synthetic securities consisting of a forward contract to purchase the guarantor's underlying security and an interest-bearing deposit at a specific cost. Interest payments are made at standard spans, and conversion into the underlying security is mandatory at maturity. PRIDES were first presented by Merrill Lynch and Co.

Securities designated as debt exchangeable for common stock is another financial product that falls under the overall classification of convertible securities or 'convertibles.' Convertibles are corporate securities (generally preferred stock or bonds) that are exchangeable for a set number of another form (normally common stock) at a pre-expressed price. Investors are drawn to convertibles for their hybrid features: One part debt, with a semi-secure income stream, coupons; and a second feature offering growth, from equity's capital gains.

Convertibles are structured products that banks and different substances package to satisfy the needs of different types of investors. On occasion, a certain form of security is preferred, say debt, however investors' cravings are not as strong without the additional equity-like features. To make a security more marketable, convertibility is another feature that can increase the demand for certain types of securities.

Utilizing Debt Exchangeable for Common Stock

A genuine illustration of where debt exchangeable for common stock may be utilized is for a company that is promising however youthful. Without an extensive financial record, this company will be unable to secure conventional debt financing, particularly at a reasonable coupon rate. To cut interest costs and make the debt offering more alluring (marketable), this security can be packaged with an additional option to convert the debt into common stock. Presently, with the additional capability of capital gains, investors could investigate demanding a more modest coupon than a straight (sans option) bond.