Provisional Call Feature

What Is a Provisional Call Feature?

A provisional call feature permits a issuer, normally of convertible securities, to recover (call back) the issue during a non-call period if certain criteria, like a price threshold, are reached.

Normal call features found in callable bonds may just be worked out, typically, after a set period like 10 after years from issue.

Understanding Provisional Call Features

A provisional call feature gives an issuer the right to accelerate the primary redemption date if the underlying common stock trades at, or over, a pre-decided level for an extended period of time. They are planned to safeguard an issuer from being forced to respect the conversion, say of a convertible bond into common stock, at a price that is unfavorable.

For instance, a convertible bond might permit a provisional call of the issue if the underlying common stock trades at 120% of the conversion price for 30 sequential days. This percentage, or numerous, of the conversion price, is known as the trigger price since it triggers the conversion. Typically, the terms of a provisional call are 150% of the conversion price for 20 successive days.

Call protection is important for investors since it guarantees the flexibility of the convertible, alongside any yield advantage it could have over the underlying shares for a fixed period of time. Typically, the greater the length of the call protection, the greater the benefit for investors.

There are two types of call protection: hard call and soft call provision. Most convertible bonds are issued with a hard-call provision, which shields bondholders from having their bonds called before a certain time has elapsed. During the hard-call protection period, a bond can't be called for any reason. Convertible bonds might carry a provisional soft call feature notwithstanding or in place of hard call protection. Soft call provisional protection is the point at which the bonds can be called subject to the share price of the underlying common stock being over a certain level.

Upsides and downsides of a Provisional Call Feature

Investors ought to carefully consider the advantages and disadvantages of a security's call feature before investing:

• Cons: A call feature causes uncertainty about whether a bond will stay outstanding until its maturity date is reached. Investors risk losing a bond that pays a higher rate of interest when rates fall and issuers call in their bonds. At the point when this happens, investors generally need to reinvest in securities that have lower yields. Moreover, calls will generally limit the appreciation of a bond's price that generally would be expected to rise when interest rates start to decline.
• Pros: Bonds with a call feature generally place investors in a difficult situation. Hence, callable bonds offer higher yields than non-callable bonds. By the by, higher yields without help from anyone else are not continuously alluring to the point of persuading investors to buy them. In this way, to make the bonds more appealing, issuers habitually set the bond's call price higher than the face value, or principal, of the issue. This difference between the call price and the principal is the call premium.

Features

• A provisional call feature permits an issuer of securities to call the issue early, even outside of the normal call window, on the off chance that some threshold is crossed.
• Typically, the terms of a provisional call are 150% of the conversion price for 20 successive days.
• Provisional call features shield an issuer from being forced to respect the conversion at a price that is unfavorable.