Recurrent Survival Analysis of Sequential Conversions of Convertible Bond (original) (raw)
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Valuation of contingent convertible catastrophe bonds — The case for equity conversion
Insurance: Mathematics and Economics
Within the context of the banking-related literature on contingent convertible bonds, we comprehensively formalise the design and features of a relatively new type of insurance-linked security, called a contingent convertible catastrophe bond (CocoCat). We begin with a discussion of its design and compare its relative merits to catastrophe bonds and catastrophe-equity puts. Subsequently, we derive analytical valuation formulae for index-linked CocoCats under the assumption of independence between natural catastrophe and financial markets risks. We model natural catastrophe losses by a time-inhomogeneous compound Poisson process, with the interest-rate process governed by the Longstaff model. By using an exponential change of measure on the loss process, as well as a Girsanov-like transformation to synthetically remove the correlation between the share and interest-rate processes, we obtain these analytical formulae. Using selected parameter values in line with earlier research, we empirically analyse our valuation formulae for index-linked CocoCats. An analysis of the results reveals that the Coco-Cat prices are most sensitive to changing interest-rates, conversion fractions and the threshold levels defining the trigger times.
International Journal of Financial Engineering and Risk Management, 2015
The aim of this paper is to analyse the pricing of highly structured convertible bonds by taking a real world case. To this end we examine the Cashes (Convertible And Subordinated Hybrid Equity-linked Securities), which are characterized by both voluntary and mandatory conversion that depend on different triggering events, as well as floating coupons whose payment hinges on dividends and earning of the issuer. Our results highlight that prices are very sensitive to the modelling of the sources of uncertainty, both market and credit risk, and underscore the relevance of the time horizon chosen for the estimation.
Convertible Bond Issues: Evidence from Security Markets
The Financial Review, 1995
A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.
Dividend-Protected Convertible Bonds and the Disappearance
2012
Firms have not historically called their convertible bonds as soon as they could force conversion. Various explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely that more than 95 percent of recent convertible bond issues are dividend-protected. Dividend protection means that the conversion value of the shares into which a bond is convertible is unaffected by dividend payments and dividendrelated rationales for call delay become moot. We document that dividend-protected convertibles are called as soon as conversion can be forced.
Risk dynamics surrounding the issuance of convertible bonds
2012
This paper analyzes the risk dynamics surrounding convertible bond offerings (CBOs) and Seasoned Equity Offerings (SEOs). As convertible bonds are commonly believed to be very effective at mitigating adverse selection or overinvestment problems we would expect differing risk and return patterns for convertible bond and seasoned equity issuers. By analyzing 1148 convertible bond offerings and comparing them to 2905 seasoned equity offerings, we show however that for both issuer types the systematic risk increases prior to issuance and drops sharply thereafter. This result is consistent with the notion of exercising real options, as growth options are always riskier than the underlying assets and exercising them at issuance causes an immediate drop in risk. The real option framework and the proposed dynamics of systematic risk also provide a rational explanation for the negative announcement effect, as well as any long-term underperformance subsequent to the CBO and the SEOs.► We analyze the risk dynamics of convertible bond and Seasoned Equity Offerings. ► Both issuers show an increase in risk prior to and a drop after the issuance. ► This result is consistent with the notion of exercising real options. ► The risk changes are responsible for the underperformance of CBO and SEO issuers.
Convertible Bonds and Option Bonds: A Comparative Study
European Business Organization Law Review, 2000
This article was first published as an introduction to Lutter and Hirte (eds.), Wandel-und Optionsanleihen in Deutschland und Europa, special issue of the Zeitschrift fur Unternehmensund Gesellschaftsrecht [hereinafter: ZGR] no. 16 (Berlin, 2000) [hereinafter-Lutter and Hirte (eds.)]. The article was slightly revised for publication here. The author and the publisher are grateful to Walter de Gruyter publishers for kindly permitting its publication and its translation by
Default and Recovery Rates of Convertible Bond Issuers: 1970-2000
2001
Summary This study refines Moody’s corporate bond default research to focus on convertible long-term debt issuers from 1970 to 2000. Given the increased popularity of this asset class, concern about the credit risk of these investments is well placed in the current environment of high and increasing default rates. Briefly this study finds that: • Since 1970, 280 convertible bond issuers have defaulted on $86.7 billion of long-term convertible debt. The distribution of convertible bond defaulters by broad industry grouping is comparable to that for all long-term corporate defaulters. • Default rates for all rated convertible debt issuers are higher than for those of issuers without convertible bonds in their capital structures. For speculative-grade-rated issuers, however, default rates do not differ from non-convertible issuers in a statistically meaningful way. • Convertible bond issuers that do not convert/redeem their bonds early face heightened risk of default not only in the th...
The aim of this paper is to analyze risk shifting incentives for managers and shareholders of the financial institution issuing a Coco-bond. We assess the role of the conversion price settlement in enhancing both shareholders’ and management’s discipline. Three recent contingent reverse convertible deals are analyzed, with the intention of showing how shareholder conversion returns are linked to the conversion ratio. The findings demonstrate that, in the case of an ingoing or ongoing crisis, a poor settlement of the conversion ratio could exacerbate both debt overhang and risk shifting issues. This will end in discouraging bank management from issuing new equity and from investing in low risk assets. We argue that a contingent bond triggered on Basel III capital requirement ratios and having a significantly discounted conversion price reduces risk shifting incentives. Moreover, we illustrate how the unexpected wealth transfers between Coco bondholders and shareholders tends to zero when the bond face value is higher than the current stock market price and there is a concentration of bond subscribers.. Accordingly, regulators should consider and oversee not only the conversion trigger but also all the other features of a contingent capital security, especially the conversion ratio. JEL: G21, G13, G28, G32
Call Timing of Callable Non-Convertible Bonds: A Survival Analysis
Journal of Reviews on Global Economics, 2018
: We empirically analyze the factors affecting corporate decisions to call non-convertible bonds using survival analysis. The results show that firms tend to defer calling non-convertible bonds in order to mitigate agency costs of debt (including under-investment and risk-shift); that calling is significantly more intense if positive information is revealed; that non-refundability clauses are binding on call decisions; that firms are more likely to redeem bonds to refund if market interest rates fall dramatically; and that this interest effect is stronger as the transaction costs of refunding decrease. Also, this paper shows that call intensity monotonically decreases after call protection periods expire