Exchangeable Security
What Is an Exchangeable Security?
An exchangeable security is an asset that can be traded sometime not too far off for a predetermined number of shares of common stock or, at times, its cash equivalent. The asset is generally a debt security.
Critically, it concedes its holder the right to trade it for shares of the common stock of a company other than the issuer of the exchangeable security. That is the fundamental difference between an exchangeable security and a convertible security, which is redeemable just for shares of the company that issued it.
Exchangeable securities are mostly utilized by companies participated in takeovers. The proceeds of the sale of exchangeable securities assist with funding the acquisition, and the investors are reimbursed in shares of the recently acquired company.
How an Exchangeable Security Works
The right to trade an exchangeable security is set off by a predefined future event or date. The security might be structured to be reclaimed at the option of the issuer or the holder of the security.
An exchangeable security that is naturally swapped for common stock shares or cash is known as a mandatory exchangeable security.
The holder of the exchangeable security receives a fixed coupon payment from the debt instrument. This payment is higher than the dividend payment on the underlying common stock for which it very well may be recovered.
Issuers of exchangeable securities utilize indicated formulas to decide the number of shares of common stock or cash equivalent that the holder will receive upon exchange.
In these formulas, the holder of the exchangeable security is much of the time subject to the entirety of the expected downside and the greater part of the upside of holding the predetermined stock.
Exchangeable securities might be issued by a company took part in a takeover. The securities are swapped for shares of stock in the target company.
Utilizations of Exchangeable Securities
Exchangeable securities are once in a while issued by corporations that are engaged with a takeover. The securing company might wish to purchase the target company yet may require extra funds to complete the transaction.
In this case, the getting company can sell exchangeable securities. The exchangeable security would give its owner the right to a predetermined number of shares in the target company after a predefined date.
On the off chance that the acquisition is effective, the exchangeable security can be traded for shares of the target company.
Exchangeable Security Example
For instance, expect an exchangeable security is issued for a stock that is as of now trading at $100 per share.
The payout formula will indicate what the holder will receive at the maturity date, contingent upon what the price of the stock is on that date. Assuming that the stock is trading at under $50, the holder could get one share of stock. On the off chance that it is trading somewhere in the range of $100 and $125, the holder could get $100 worth of stock. On the off chance that it is trading at higher than $125, the holder might receive 2/3 of a share of stock.
Exchangeable securities can be considered debt instruments with a embedded option with respect to the underlying common stock.
Features
- The formula for repayment and the date it is effective are indicated upfront.
- Exchangeable securities are generally debt instruments, to be reimbursed with stock shares.
- Investors in exchangeable securities might be reimbursed with shares of the common stock of another company, or in its cash equivalent.
