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Cross Between Debt & Equity
Given
the development and evolution of products in our capital market,
there are now some hybrid investments that are part equity
and part debt.
Loan
Stocks
You may have heard of CULS, which are unsecured loan stocks.
A loan stock is a security issued by a company for a loan made
to it by investors. CULS combine certain advantages of bonds
(which are loan securities) with the option of converting into
ordinary shares, known as the conversion privilege. The bond
characteristics of CULS are they pay investors a fixed rate
of interest and the principal sum on maturity. The equity part
of ICULS materialises when they are converted into shares where
the investor can enjoy possibilities of capital appreciation.
CULS
can be issued in the form of redeemable (RCULS) or irredeemable
(ICULS) convertible unsecured loan stocks. If the loan stocks
are irredeemable, the holder must convert the ICULS into shares
on maturity (normally after four to five years) at a predetermined
conversion ratio and conversion price. If redeemable, then
on maturity the holder can either convert the RCULS into shares
or redeem the RCULS from the issuing company at their par
value.
Companies issue CULS because they make the bonds more saleable
with the addition of a conversion privilege. CULS also lower
the cost of borrowing money and may enable the company to
raise equity indirectly on more favourable terms than through
the issue of new shares. To the investor, CULS gives him a
security that combines much of the safety and income certainty
of a bond with the option to convert into common shares and
benefit from any increase in share prices.
Preference
shares
Preference shares are also a form of equity hybrid, which carry
a prior right to a fixed dividend (ordinary shares do not have
a right to a fixed dividend). This fixed dividend is usually
expressed as a percentage of the share's nominal value, and
is paid when sufficient profits are earned. Preference shares
that also carry the right of any arrears of preference dividend
which has not been paid, is known as cumulative preference
shares. Preference shares that are not entitled to such
arrears in dividends are called non-cumulative preference
shares. |
