ArticlesBonds: Convertible, Exchangeable and Profitable

October 31, 2022by Stavros Koumentakis

We have already approached the concept and basic principles governing the Bond Loan as well as its issue. Bonds, also, both in their common form and their special (hybrid) categories (incl.: “Perpetual”, “Catastrophe”, “Reduced Coverage”). The possibility, lastly, of the Bond Lenders to capitalize, under conditions, their claims. However, there are some special categories of bonds with special interest: Convertible, Exchangeable and Profitable; this article is about them.

 

Bond loan categories

In the law on SAs (law 4548/2018) we find four categories of bond loans – corresponding to the bonds issued under each one. Specifically – those with: (a) common (art. 69), (b) exchangeable (art. 70), (c) convertible (art. 71) and (d) profitable bonds (art. 72). We looked into the common bond loan (with the common, i.e., bonds) in its basic form. It is, moreover, the one most commonly used. It represents a pure form of financing with foreign capital – as long as some hybrid element (referring to capital financing) does not intrude into its terms. The other categories of bond loans, however, constitute forms of intermediate financing. Let’s take that approach too.

 

Exchangeable bonds

Basic features

It is possible (art. 70 §1 Law 4548/2018) to issue a bond loan with exchangeable bonds. The bondholders retain, in this case, the right (option) to request, with their own declaration, the (partial or total) repayment of their bonds, based on what is defined in the loan agreement. This repayment is not carried out in monetary terms but by transferring to them other bonds or shares or other securities of the issuer or third parties.

A corresponding right of exchange may (also) be reserved in favor of the issuer.

At the same time, it is possible for the bond loan to stipulate that the exchange becomes mandatory at a certain time or when a certain event occurs. It is also possible for it (the exchange) to depend on some suspensory condition.

In the event that the issuer SA or a third party grants the right to exchange the (exchangeable) bonds, it is obliged to have and keep in its ownership free from any encumbrance (with the possible exception of ones existing in favor of the bondholders) the underlying bonds, (own) shares or other securities. This obligation extends, at the latest, until the time of payment/repayment of the loan (no pre-emptive right of existing shareholders is therefore established). The issuing SA, alternatively, is obliged to have drawn up a contract, which ensures the possibility of timely delivery, through a third party, of the bonds, shares or other securities in fulfillment of their relative obligation (art. 70 §2).

The bond loan with exchangeable bonds acquires a hybrid form, in which case the bonds will be exchanged for shares. The bond lender, in this case, will become its shareholder.

It should, however, be noted that the bond holder acquires shares that exist at the time of the exchange and are not then issued for the first time. On the other hand, the holder of convertible bonds (analyzed below) acquires SA shares that are issued for the first time when the bonds are converted (art. 71).

The terms of the convertible bond form part of its contract. However, their configuration depends (also) on the securities with which the exchange is imminent. When, e.g., the bondholders are to receive securities that are registered (ind.: shares), then, correspondingly, the exchangeable bonds should also be issued, compulsorily, as registered (art. 59 §5 section a’). When the exchangeable bonds are to be listed on a regulated market, the securities with which they are to be exchanged (incl.: shares) should either already be listed or be listed at the same time as them (art. 6 §7 n. 3371/2005).

The advantages

The possibility provided to the bondholder to claim the repayment of their bonds from the SA or (instead) to be request the transfer to them of other, agreed upon securities (incl.: bonds, shares of the SA or of third parties) can function as a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the background is created for the optimal choice on its part (either paying off bonds or exchanging them for the agreed securities).

 

Convertible bonds

Basic features

It is possible, in accordance with what has already been mentioned, to issue a bond loan with convertible bonds (: convertible bonds- article 71 Law 4548/2018). They give the bond lenders the right to return their capital as well as interest. However, they provide, at the same time, the possibility of their (potential or mandatory) conversion into a predetermined number of shares. The bond lender of the issuing SA will then become its shareholder. This feature is also found, as mentioned above, in convertible bonds; however, in the case of the latter, the bond lender acquires existing (and not newly issued) shares of the issuer.

By converting convertible bonds, new shares are created. The issuance, therefore, of the bond loan will end up as a capitalization of liabilities through an increase in share capital. The amount of the loan that will be converted into capital will also constitute the contribution necessary for the increase.

Issuance

The issuance of the convertible bond loan follows the procedure of either the ordinary (Article 71 §1 para. a) or the extraordinary increase (Article 71 §1 para. b) of share capital.

In case of an ordinary issuance, the General Assembly takes the relevant decision with an increased quorum and majority. Such a decision constitutes an amendment to the statute (article 71). The Board of Directors of the SA is obliged until the end of the next month from the day of the exercise of the conversion right to ascertain the increase and to adjust the article of the statute referred to in the chapter, observing the formalities of publicity (art. 71 par. 4 sub. b).

In the case of an emergency bond loan issue with convertible bonds, the competent body for making a decision to issue convertible bonds can be either the Board of Directors or the General Assembly – subject to the provisiona of the articles of association and the law.

The decision on the issuance

The decision to issue the convertible bond loan by the competent body of the SA must include (71 §2, section b) the time and method of exercising the conversion right, the price or the reason for conversion or their range. Also: the time or period of exercise of the conversion right as well as any denominations that need to be filled. It is also possible to determine the type of exercise of the relevant right or the competent person to whom the relevant exercise of the conversion right should be addressed.

A potential content of the issuance decision can be “…the way to readjust the price or the conversion ratio, if events occur that may affect the value or marketability of the shares” (art. 71 §2 section b) Law 4548/2018). If there is no relevant provision, the relevant risk (e.g. on a bad business course of the SA) is borne by the respective bond holder.

The Board of Directors is defined as the competent body for defining the final price or the final adjustment ratio before issuing the loan – even if the Board of Directors determines them precisely.

Preemptive right

The existing shareholders have a right of preference in the case of the issuance of bonds with the right to convert into shares (art. 26 §1). However, such a right is expressly excluded at the time of conversion of the bonds into shares (art. 71 §4 in fine). A corresponding right is not reserved, however, to the already existing bond lenders, whether an increase in the SA’s share capital or the issuance of convertible bonds takes place – at least not without a relevant statutory provision.

The advantages

The (potential) opportunity given to the bondholder to retain their loan claims or to become a shareholder of the SA, can make the bond loan a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the choice of the optimal option, based on its financial data, is facilitated.

 

Profitable bonds

Key features & issuance

The profitable bonds (participating bonds- article 72 law 4548/2018) have the effect of giving the bond lenders the right to receive either a percentage of the company’s profits (and, in fact, beyond the agreed interest) or another benefit linked to the company’s position.

The receipt of a percentage of the profits can take place before (and not only after) the minimum dividend is distributed to the (common or preferred) shareholders.

The competent body for the decision to issue profitable bonds is the General Assembly, which decides by simple quorum and majority. This seems normal, as through the exercise of the right to take a percentage of the profits from the bond lenders a significant influence is exerted on the profits of the shareholders. Thus, the shareholders are the ones who have to decide on a potential realization of such a reduction. Through an application by analogy of the extraordinary capital increase, it is possible to provide authorization to the Board of Directors, in order for the latter to proceed with an ” extraordinary ” issue of profitable bonds.

The right to receive a percentage of profits is also the element that classifies profitable bonds in intermediate financing. Through them, the bond lenders have claims that directly dependent on the results of the SA. Profitable bonds, despite their differences, are similar to preferred shares (non-voting) which, at the same time, provide the right to receive interest.

The advantages

Profitable bonds become attractive to investors as they imply the reduction or elimination of currency risks or reduced return on capital, since in times of profitable corporate years bondholders enjoy an additional investment benefit. At the same time, however, they become attractive for the SA as a lower burden (low interest rate) is achieved due to the additional claims/expectations they provide to the bondholders (: participation in profits).

 

Convertible, exchangeable and profitable bonds are not the most common in a bond loan. They are, accordingly, not common as a more specialized option for funding of the SA. However, as they offer attractive solutions both for (potential) investors and for the SA itself, they can be a means of attracting investment funds as well as an important alternative for the SA itself: an alternative capable of contributing not only to its survival but also to its development. –

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 30th, 2022).

 

Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

Stavros Koumentakis

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