Convertible Bond Hedging

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Convertible bond issuers will often execute a call spread overlay concurrently with a newly issued bond. In addition to potential tax and accounting advantages, the call spread synthetically increases the conversion price of the bond thereby reducing the dilutive effects of the convertible. Call spread structures are very specialized and technically complex. These private transactions tend to be very profitable for the dealers in the underwriting group who often act as counterparties to the call spread.

Since most transactions are one-offs, many issuers have little to no experience in valuing or negotiating the call spread structure, instead relying solely on the advice of their dealers, who may have a conflict of interest, or their existing legal team, who typically do not have trading floor experience or highly quantitative backgrounds.

By partnering with Riverside, you benefit from working with a respected team of experienced and financially sophisticated derivatives professionals with relevant hands-on experience with the complexities of the call spread transaction.

New Issue

Riverside has been a trusted advisor on over $1.5 billion of call spread transactions. Riverside does not replace the dealers; we act as an independent advisor to you and have no conflicts of interest – your goals are our goals. Through structure analysis and execution design, we drive price negotiations with the dealers on your behalf, saving you a significant amount in execution costs often in the millions of dollars.

Terminations and Amendments

Whether due to a change of control, spin-off or other event, the termination or amendment of a call spread can be very expensive for the issuer and very profitable for the dealers. Often occurring in the midst of major changes within the organization, the negotiation of the call spread tends to take lower priority or may be neglected until the final phases of a transaction.

The magnitude of unwind values may also come as a surprise to management or the buy-side of a transaction as periodic mark-to-market valuations provided by the dealers, if any, do not necessarily reflect unwind levels. Because the call spread is a private transaction between the issuer and the dealer, understanding and responding to each dealer’s valuation of the unwind or adjustment can be challenging, technically complex and time consuming. Riverside becomes a member of your deal team allowing senior management to concentrate on the aspects of the primary transaction. We have saved our clients millions of dollars from our pricing valuation and direct dealer negotiations.

Additionally, following the recent Volcano Corporation Shareholder Litigation among others suits, Boards of Directors have become increasingly sensitive to understanding any conflict of interest that may exist with their advisor on a potential transaction who may also be a dealer counterparty. Riverside acts as an independent third party to senior management and the Board to assist in identifying and quantifying the materiality of any potential conflict benefiting all parties involved.

Commercial Terms of the ISDA

ISDA Agreements contain many complex terms and conditions. We work in close partnership with your internal and external counsel to ensure that the commercial terms in the ISDA confirmations work in your best interest during the life of the transaction.

Additionally, in a typical transaction, your counsel will negotiate directly with one counsel who represents all of the dealers on the convertible bond and call spread transaction. On your behalf, Riverside negotiates key elements of the material economic terms directly with the decision-makers on the trading desks, which reduces the “club” effect for all decisions and provides fair and competitive terms to all parties. Examples can include counterparty risk mitigation, and pricing or valuation methods upon termination to set you up for a more fair and equitable outcome.

Confidentiality

We understand that these transactions are highly confidential and very market sensitive. Each communication with the Riverside team, from the initial inquiry to the closing of the deal, will be treated with the highest degree of care and confidentiality.

Please contact Joyce Frost, Partner, at 212-799-0252 or joycefrost@riversideadvisors.com for more information.