BDO's documentation on convertible instruments

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Leo
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Joined: 05 Apr 2020, 22:31

BDO's documentation on convertible instruments

Post by Leo »

Hi everyone,

I have a question relating to BDO's documentation :

https://www.bdo.com.co/getattachment/Pu ... attachment

More specifically on the example 2, page 21 and example 3 on page 44.

My question is that I'm struggling to differentiate these two cases. From my understanding, they both result into conversion of a debt into a various number of shares, but why in the example 2 it's a derivative but in the example 3 it isn't ? What are the nuances, please enlighten me !
JRSB
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Re: BDO's documentation on convertible instruments

Post by JRSB »

I think the second converts at a fixed price whereas the first is a variable number of shares based on the recent average share price (hence the derivative liability)
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: BDO's documentation on convertible instruments

Post by Leo »

Thanks JRSB, but I've read it twice and it says :

"Conversion feature to convert CU1,000 into the number of shares at their quoted market price." Which means that if the share increase from 10 LC to 12 LC, it's the 12 LC that will be based on to calculate the numbers of shares.

Furthermore, in the analysis, they said :"The entity may be obliged to issue a variable number of its own equity instruments if the holder exercises the option, therefore the answer to Question 7 is yes, and the conversion feature is a liability".

If the price is fixed, the number of shares won't vary, would it ?
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: BDO's documentation on convertible instruments

Post by Leo »

Hi JRSB, I think the reason is :

In the example 3 on page 44, it's a derivative liability but, as the conversion price is set at the conversion date market share price, the derivative liability has no value. It means that the holder can, upon reception of those shares, sell them immediately, and he will end up with the same amount of liability.

In the example 2 on page 21 : it's a derivative liability but, the conversion feature has a value because, it's based on VWAP in the previous 30 days prior to maturity. It means that :

For example for a debt of 1 000 LC, if the lowest 5 days value of the previous 30 days prior to maturity is 10 LC, but at the maturity date, the stock jumped at 20 LC, the holder would receive 100 shares, and sell them immediately, to receive 2 000 LC.

I understand now, thanks for your help !
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