Mandatory Convertible Bonds as an Efficient Method of Issuing Capital

Abstract

Mandatory Convertibles Notes (MCNs) mean only a small fraction of all the securities issued by corporate or financial institutions, however, they represent nearly a 30% in volume of the convertible securities issued every year. MCNs share characteristics of equity and debt securities but rating agencies assign them a high equity component and are commonly treated as equity by accounting standards. Despite the high facial coupon that MCNs seem to pay, a deeper analysis shows that the cost of MCN can be lower than the cost of issuing hybrid or subordinated debt and in some cases similar to the cost of issuing senior debt. Mandatory convertibles were profusely issued by financial institutions amid the global crisis as a means to increase capital and could be considered as a predecesor of some types of AT1 and Contingent Convertible. The academic literature about Mandatory Convertibles is scarce and we consider necessary to shed some light on a type of security that can be very useful for the real economy Keywords: