Hung Convertibles
Contents
Exploring Hung Convertibles: What They Are and How They Work
Hung convertibles are a unique type of convertible security that carries implications for both investors and issuing companies. In this article, we delve into the intricacies of hung convertibles, from understanding their definition to exploring their benefits, limitations, and special considerations.
Understanding Hung Convertibles
Hung convertibles, also known as busted convertibles, are convertible securities where the share price of the underlying security is significantly below the conversion price. This discrepancy makes it unlikely that the securities will be converted into common stock. Consequently, hung convertibles often trade more like debt instruments than equity securities.
Examples and Implications
An example of a hung convertible could be a convertible debenture with a conversion price of $10, but the price of the underlying stock is only $4. In such cases, the conversion feature becomes less attractive, and the convertible behaves more like a traditional bond. To address the issue of a hung convertible, the issuing company may need to improve its fundamentals to boost the common stock price.
Benefits and Drawbacks
Hung convertibles offer investors the potential for income through coupon payments, along with the opportunity for capital appreciation through conversion into common stock. However, they typically come with lower coupon rates compared to traditional bonds and are subject to risks associated with stock performance.