Concept of convertible bonds
Obligations convertible (voluntarily) into shares are fixed-income assets with long-term maturities, which give the option to exchange these obligations for shares of the same issuer, in certain periods of time and under pre-established conditions in the issue prospectus. They are regulated in articles 292 and following of the Corporations Law.
The investor will exchange a fixed-income asset for a riskier variable-income asset, depending on whether the exchange rate is more or less favorable and on the stock market prospects. This conversion right cannot be transferred separately from the obligation. For the issuing company, this type of obligation is a method to borrow in a first phase and, subsequently, increase capital. One of the possible procedures to carry out a capital increase is through the conversion of debentures into new shares.
If the bonds are ‘compulsorily convertible’, then we are facing a full-fledged capital increase. Whoever acquires this type of bond knows that he begins by lending money to the issuer but that in the end his loan will end up becoming share capital and his bonds will inexorably be exchanged for shares in certain periods of time and under conditions set forth in the issue prospectus.
When the word ‘exchangeable’ appears instead of ‘convertible’, it means that the bonds are exchanged for old, already existing shares, and therefore an issue of ‘exchangeable bonds’ does not give rise to any capital increase.
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