Convertible Securities: A Tollbox Of Flexible Financial Instruments For Corporate Issuers

During the 1990s, convertible and equity‐linked securities emerged as a major source of financing for U.S. corporate issuers. Issuance volume grew steadily throughout the decade and the secondary market value of U.S. convertible securities now exceeds $200 billion. In this overview of the market, the authors discuss the following: (1) the growth of issuance volume in the U.S. equity‐linked market; (2) the basic characteristics of convertible securities; (3) convertible debt alternatives; and (4) convertible preferred alternatives. As a result of the proliferation of new convertible structures, corporate issuers are now able to adjust coupon/dividend, conversion premium, and call protection in order to meet their tax, accounting, rating agency, and cost‐of‐capital objectives. Historically, the convertible new issue market has had a broad variety of issuers, spanning all industry sectors as well as both investment grade and high yield credits. But in the last two years, the most aggressive issuers have been technology‐oriented companies, including telecommunications, Internet, hardware, software, and biotechnology concerns. Such technology‐related issuers, which are often rated below investment grade and unable to secure straight debt capital, are generally in heavy‐spending phases and view convertible bonds as a source of inexpensive financing. At the same time, investment‐grade, “old‐economy” issuers have continued to use convertible securities selectively, in most cases as cheap “quasi‐equity” in the context of mergers and acquisitions, or as a tax‐deferred strategy for selling cross‐holdings of stock.