Mandatory Convertible Notes as a Sustainable Corporate Finance Instrument

Angel Huerga and Carlos Rodríguez-Monroy
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Angel Huerga: Department of Organization Engineering, Business Administration and Statistics, Industrial Engineering School, Universidad Politécnica de Madrid (UPM), 28006 Madrid, Spain
Carlos Rodríguez-Monroy: Department of Organization Engineering, Business Administration and Statistics, Industrial Engineering School, Universidad Politécnica de Madrid (UPM), 28006 Madrid, Spain

Sustainability, 2019, vol. 11, issue 3, 1-26

Abstract: Debt securities are often an efficient and inexpensive resource to finance the balance sheet of companies; however, one of the causes of the global financial crisis was the excessive leverage taken by companies. Hybrid capital instruments share characteristics of equity and debt, and allow companies to finance its balance sheet in a more sustainable way by reducing leverage, but tend to increase its overall cost of capital. Mandatory convertible notes (MCNs) are hybrid financing instruments that are very close to equity; rating agencies assign them a high equity component and are commonly treated as equity by accounting standards. Despite the high nominal coupon that MCNs seem to pay in some cases, a deeper analysis shows that the cost of issuing MCNs can be similar and even lower than the cost of issuing senior debt. This research performs an empirical study of the implicit cost of the MCNs issued between 2010 and 2018. The study shows the relationship between the implicit yield of MCNs, the senior debt yield, and the convertible arbitrage investors. MCNs can be a sustainable capital alternative that offers a reasonable cost not only for high-yield companies but also for well-established investment grade issuers. The access to efficient and not very expensive capital to finance the balance sheet of companies can promote sustainable growth, industrialization, and innovation.

Keywords: mandatory convertible; sustainable finance; options; hybrid securities; financing policy (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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