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Anti-dilution adjustments
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Settlement calculations
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Make-whole calculations
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LIBOR / benchmark replacement
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Complex calculations
- Convertible/exchangeable bonds and Capital Securities with an equity conversion feature typically include a broad range of events which can require a change to the conversion price or exchange property, including
- Dividends/distributions
- Equity or equity-linked capital raising
- Stock splits and consolidations
Our Services
ConvEx as Calculation Agent
- When ConvEx is named as Calculation Agent in the terms and conditions of the instrument, issuers benefit from our experience in ensuring their documentation avoids known problems, and we are also responsible for performing the calculations when needed
- Being named up-front allows us to provide this service proactively and at a much lower cost than appointing an Independent Expert or adviser after problems have already arisen
ConvEx as Calculations Adviser
- If you have issued an instrument without naming a calculation agent in the documentation, ConvEx can be appointed after the fact as Calculations Adviser, to provide a similar level of service as we do to our Calculation Agency clients, providing the service proactively
ConvEx as Independent Expert
- In the event of a dispute or uncertainty as to a calculation, ConvEx can provide advice or independent expert support
- Our extensive capital markets experience and knowledge of securities documentation allows us to consider the formulaic provisions, but also to put them into a market context to assist in clarifying the original intent to arrive at a fair solution
- Where needed we can provide written opinions for the issuer’s reliance
- Many convertibles, exchangeables and capital securities include flexible settlement alternatives for the issuer upon conversion and/redemption of the instrument, by delivering either cash, shares or a combination thereof
- The determination of the relevant amount of shares and/or cash to be delivered to bondholders is based on complex price-setting processes and formulas
- ConvEx provides a report to the issuer every time a calculation is required, ensuring the issuer is able to manage its delivery obligations
- In hiring ConvEx to perform settlement calculations, issuers:
- minimise the risk of errors by obtaining external, expert assistance from an independent third party drastically cut the time and internal resources
- outsource responsibility for the calculations to ConvEx
- have the support of a name trusted by the market
Our Services
ConvEx as Calculations Adviser
- If you have issued an instrument without naming a calculation agent in the documentation, ConvEx can be appointed after the fact as Calculations Adviser, to provide a similar level of service as we do to our Calculation Agency clients, providing the service proactively
ConvEx as Independent Expert
- In the event of a dispute or uncertainty as to a calculation, ConvEx can provide advice or independent expert support
- Our extensive capital markets experience and knowledge of securities documentation allows us to consider the formulaic provisions, but also to put them into a market context to assist in clarifying the original intent to arrive at a fair solution
- Where needed we can provide written opinions for the issuer’s reliance
Background
- A make whole call gives a bond issuer the ability to call a bond at any time, discounting future cash flows at the prevailing government bond yield plus a spread (typically 10-50bps)
- While US dollar and high yield bonds have included make-whole calls for many years, their use has grown more recently in investment grade bonds, rising to 50% of all issuance
- Significant variance in documentation between transactions, including a number of common problems
- Structural considerations when including a make-whole call
- How likely is it to be used?
- How easy will it be to operate the make-whole provisions when they are needed?
- Who is responsible for determining the make-whole price?
- What is “best practice” when it comes to documentation and execution?
- What to do when the make-whole documentation contains flaws?
Our Services
ConvEx as a make-whole adviser and/or Independent Expert
- ConvEx is an highly experienced in performing make-whole calculations
- We assist companies in exercising these options, interpreting complex documentation, determining benchmark bonds, assisting in sourcing quotes, and communicating with bondholders and other involved parties
- Where needed we can provide written opinions for the issuer’s reliance
- We are familiar with the most common problems in the documentation, and can assist issuers in avoiding the associated pitfalls
ConvEx as Make-Whole Calculation Agent
- When ConvEx is named as Calculation Agent in the programme or bond prospectus, issuers benefit from our experience in ensuring their documentation avoids known problems, and we are also responsible for performing the calculations when needed
- We can provide this service at a much lower cost than appointing an Independent Expert or adviser at the time of exercise
Background
- Transition of LIBOR to Risk Free Benchmark Rates by end of 2021 is being seriously deliberated by several market groups
- However, billions of dollars / pounds / euros of existing and still to be issued financings reference LIBOR beyond 2021
- Fall-back methodologies in bond documentation
- The fallback methodologies in most floating-rate bonds were designed to accommodate short term disruption in LIBOR, rather than permanent disappearance of the benchmark
- For example, asking a selection of banks for a quasi-LIBOR quote and, failing this, taking last rate until resolved / maturity
- Until a new standard is agreed, issuers are searching for solutions to ensure their instruments can continue to function as intended in an uncertain environment where we do not know what the replacement will look like
- The most recent transactions have identified the key issues (e.g. is there a matching term successor rate, what is the correct margin impact?)
- However, most current proposals require the issuer to hire an IFA in the future, once the benchmark no longer exists
- We take a different approach. ConvEx believes benchmark replacement can be split into two scenarios, each with its own solution:
Our Services
ConvEx as Benchmark Replacement Agent
- ConvEx is experienced at managing complex provisions and applying market knowledge to determinations that affect capital markets instruments
- When named up-front to the role, we can handle all but the most remote outcomes, namely those situations where:
- The benchmark is replaced by a direct successor (“new LIBOR”); or
- The benchmark replacement methodology has been set into legislation; or
- The benchmark replacement methodology has been recommended by a relevant body; or
- The benchmark replacement has been adopted as a market standard for derivative transactions
ConvEx as adviser and/or Independent Expert
- For pre-existing instruments, we will review the fall-back mechanisms in the documentation, advise issuers on potential approaches, and can even provide Independent Expert opinions to support consent solicitation and liability management exercises
- Complex and non-standard bond calculations
- Non-standard interest accruals
- Step-ups/step-downs
- Performance- or profit-linked interest payments
- Share price or index-linked redemption calculations
- ConvEx has significant experience performing complex calculations in capital markets instruments and derivatives
Our Services
ConvEx as Calculation Agent
- When ConvEx is named as Calculation Agent in the terms and conditions of the instrument, issuers benefit from our experience in ensuring their documentation avoids known problems, and we are also responsible for performing the calculations when needed
- Being named up-front allows us to provide this service proactively and at a much lower cost than appointing an Independent Expert or adviser after problems have already arisen
ConvEx as adviser and/or Independent Expert
- In the event of a dispute or uncertainty as to a calculation, ConvEx can provide advice or independent expert support
- Our extensive capital markets experience and knowledge of securities documentation allows us to consider the formulaic provisions, but also to put them into a market context to assist in clarifying the original intent to arrive at a fair solution
- Where needed we can provide written opinions for the issuer’s reliance
