Debt Exchangeable for Common Stock

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Definition: Debt Exchangeable for Common Stock

Debt Exchangeable for Common Stock is a debt instrument just like convertible preferred stocks. It gives a regular coupon payment to the holder along with the long call and short put options on the company’s stock.

There are a number of options for a company to raise money like bonds, debentures, preferred stocks, DECS, etc. DECS. DECS comes under the category of convertible security whereby the DECS holder has an option to convert the security to common shares of the company. DECS can be issued by a company or a blockholder (owner of large amount of shares of the company) to raise capital when needed.

Sometimes the DECS are issued under mandatory convertibles which means the choice now reduced to obligation to convert to common stock. After a certain period of time the security is necessarily to be converted into the equity shares under mandatory convertibles. With long call and short put options available to the buyer of the DECS, he can buy the stock if he believes that the price of the stock will rise in future or he may sell even the put option (short put). Hence there is a greater flexibility given to the owner of this instrument.

For Example: If a corporation issues a DECS of 100million dollars based on its common shares at $15 share price. The DECS pays a coupon payment of 10% on it. Hence the buyer of the DECS will receive a coupon payment each year and in addition he will have the option to convert that DECS security to common stock of the company.



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