Exchangeable Debt

Exchangeable Debt

A debt security that the holder may exchange, at a certain price, for common stock in the company other than the one that issued the debt security. The number of shares one receives for each security and the price one pays for those shares are determined when the exchangeable debt is issued. Most of the time, the common stock is in a subsidiary of the company that issued the exchangeable debt. Exchangeable debt is a low-risk investment, but it affords the investor a great amount of leeway because he/she can exchange it for another security with higher risk and a higher return. Exchangeable debt operates like a convertible bond; the main difference is the fact that in a convertible bond the common stock that one may buy is the stock of the company issuing the bond rather than that of a subsidiary.
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In the acquisition the selling stockholders will receive a mix of consideration comprising: USD 1.1bn in cash, 138m newly issued shares of LMCK and a USD 351m exchangeable debt instrument to be issued by Formula One and exchangeable into shares of LMCK.
Many researchers put forward an argument that the exchangeable debt issue may be a method of defending against a hostile takeover.
In February 2003 the KfW announced the exchangeable debt issue on the telecommunication giant's shares and it was carried out in July 2003.
Abstract We study mandatory exchangeable debt offerings.
Keywords Mandatory' exchangeable debt Asymmetric Information - Stock price effects
Exchangeable debt is bonds issued by one company that are convertible into common shares of a second company (hereafter the underlying firm) in which the issuing firm has a stake.
In this paper we ask if managers can use asymmetric information in their decision to issue exchangeable debt. We hypothesize that issuers with unfavorable information about the future value of the underlying firm use exchangeable debt to profit from that information.
For investors, exchangeable debt serves essentially the same function as regular convertible bonds--reasonable and predictable cash flow and upside appreciation potential with downside loss protection.
Schizer, Columbia University Law School, "Frictions and Tax-Motivated Hedging: An Empirical Exploration of Publicly-Traded Exchangeable Debt"
This paper analyzes the valuation effects of and the motivation for issuing exchangeable debt -- a hybrid form of convertible debt.
A conversion feature integrated with a debt instrument (i.e., a convertible or exchangeable debt) will obviously require a lower yield and may well cause the instrument to fail the significant OID test.
The selling stockholders in the acquisition will receive a mix of consideration comprising USD1.1bn cash, 138m newly issued shares of LMCK and a USD351m exchangeable debt instrument to be issued by Formula One and exchangeable into shares of LMCK.