Convertible Bonds and Warrants
This article explains specific instrument properties used in FundApps to define the characteristics of convertible bonds and warrants.
These two instruments contain an underlying instrument, usually an equity. In a positions file, this is represented as the component. The InstrumentId of the component allows FundApps to reference the underlying equity properties without having to the instrument properties present twice in the positions file. However, there are still some properties that are specific to the top-level instrument that plays a large role in determining whether a convertible bond or warrant is disclosable under specific disclosure regimes.
Note on Quantity: When providing the quantity for Convertible Bonds and Warrants, enter the 'number' of actual Bonds or Warrants held. We have seen examples of clients providing the nominal value of their assets instead of the quantity. If this is the case, you should calculate the quantity as
Quantity = (nominal value of your asset)/(face value of a single bond)
Note on MaturityDate: this should be the first day the security can be converted into the underlying.
Convertible bonds are debt instruments modelled with the asset class of "Convertible" in FundApps and have an underlying equity. There are various characteristics about these bonds which are relevant in the shareholding disclosure world. In shareholding disclosure, the treatment of these bonds is very similar to the treatment of warrants, modelled with the asset class "Warrant".
These two asset classes are similar in the sense that the same characteristics for both asset types determine whether they are disclosable under certain regimes. Below is a description of two characteristics of convertibles and warrants, as well as an explanation of how they impact disclosure requirements and how FundApps captures these aspects.
IsCoveredConvertible - This property defines whether a convertible bond references shares already in issue or shares to be issued by the issuer upon conversion of the bond. This information is needed as some disclosure regimes only ask for disclosure of bonds that convert into shares already issued in the market, sometimes referred to as exchangeable bonds.
As the prospectus for some convertible bonds may allow for conversion into issued shares, 'to be issued' shares, and even cash in some cases, we understand that setting this property is not as black and white as it sounds. Further, the conversion choice might be determined on the day of conversion and will not be something that investors will know during the time the bond is held. Hence, if this information can't be sourced readily, FundApps allows the use of the value "Undetermined". The reason that FundApps allows this value is that setting the property to True or False will not be conservative across the entire rule package. Using "Undetermined" will treat the convertible bonds conservatively across all the FundApps rules.
IsCoveredWarrant - This property works exactly the same way as IsCoveredConvertible, meaning that it determines whether the warrant references shares already in issue (True) or shares to be issued upon conversion of the warrant (False). We have not come across warrants issues where the conversion was not defined, so the "Undetermined" value is not accepted in this case.
InControlOfConversion - This property is used to specify whether the holder of the convertible bond or warrant also holds the right to convert it. Some disclosure regimes are only interested in Convertibles and Warrants if the holder also has control over them when the conversion takes place, meaning that the holder can decide when it will receive the underlying shares of the convertible or warrant. These regimes will therefore not be interested in holdings that are converted when instructed by the issuer of the bonds. If in doubt of how to populate this property, the conservative approach will be to set it to True for all Convertible Bonds and Warrants.
These are the most important characteristics of convertible bonds and warrant in regards to shareholding disclosure. To view the full data spec, please visit our documentation page. And should you have any additional questions, please feel free to give us a call or email email@example.com.