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What are Convertible and exchangeable Securities?

Convertible and exchangeable securities are types of Equity-linked Debt Securities. They confer a right on the investor to convert its debt into equity (ie shares) of the issuer or to exchange its debt for equity in another company. This Practice Note deals mainly with transactions where both the securities and the exchange or conversion shares are tradeable and listed.

They are also called 'hybrid securities' because they share characteristics of both debt and equity (see Practice Note: Debt securities and equity compared).

The main difference between a convertible security and an exchangeable security is:

1. •

   convertible securities give the investor the right to convert its debt into new equity of the issuer or a group company, or sometimes into existing shares in the issuer which the issuer holds itself (treasury shares), whereas

2. •

   exchangeable securities give the investor the right to exchange its debt for existing shares held by the issuer in a third party

The issuer is usually also entitled to elect to pay a cash amount