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1、CHAPTERSIXTYCONVERTIBLESECURITIESANDTHEIRVALUATIONMIHIRBHATTACHARYA,PH.D.ManagingDirectorQuellosCapitalManagementConvertibledebenturesandconvertiblepreferredsharesor,moregenerally,equity-linkedsecuritiesspanthespacefromcommonstockontheonehandtononcon-vertible(straight)debton
2、theother.Whilethemajorityofnewlyissuedconvertiblesecuritiescombinesabalanceofthecommonstockandstraightdebtattributes,somearecloseproxiesforcommonstock,andothersareskewedtowardstraightdebt.Somenewissuesmayhavematurityofasshortasthreeyears,asinthecaseofconvertiblenotesandmanda
3、torilyconvertiblesecurities,whereastraditionalconvertiblepreferredsharesareperpetual;thatis,theissuerisnoteverrequiredtorepaytheparortheprincipalamountofthesecurity.Overtime,aconvertiblesecuritythatmayhavestartedoutasveryclosetostraightdebtmaybecomeverymuchlikecommonstockowi
4、ngtopriceappreciationinthecommonstockintowhichitisconvertible,calledtheunderlyingstock.Thereverseisalsotrueasthepriceoftheunderlyingcommonstockdeclines.Convertiblesecuritieshaveevolvedsignificantlyalongwiththemarket’ssophisticationinanalytics,trading,andattentiontorisk.Thisch
5、apterwillexam-inetheproductsthatcomprisetheassetclass,thesizeofthemarketanditsevo-lution,motivationsfortheirissuanceandpurchase,andtheirstructuralaspects.Asubstantialpartofthechapterwillfocusonvaluingandhedgingthesesecuritiescolloquiallyknownasconvertiblesorconverts.Passingr
6、eferencewillbemadetoconvertiblemarketsinEuropeandJapan.Theessentialfeaturesofconvertibleproductsandnotableexceptionsthere-toareasfollows:•Aconvertiblesecuritymaybeconverted,generallyatanytimeuntilitsmaturitydate,intotheunderlyingcommonstock.Exceptions:Somecon-vertsmayhaveani
7、nitialnonconversionperiodofupto6to12months.IntheearliereditionsofthisHandbook,thistopichadbeencoauthoredwithYuZhu.Iremaingrate-fulforhiscommentsandinsight.1393Copyright©2005,2001,1997,1995,1991,1987,1983byTheMcGraw-HillCompanies,Inc.Clickherefortermsofuse.1394PART8Convertibl
8、eSecuritiesAverysignificantnumberofrecentU.S.convertibleissueshaveacontingen
