ACBM moves to make convertibles less risky

The Association of Convertible Bond Management (ACBM) has drawn up a series of new recommendations to protect investors from non-standard convertible bond issue terms. The standardisation and clarification guidelines are seen as an important measure to protect investors that have become wary of missing or vague clauses contained in some convertible issues.

The ACBM said that the growing volume and complexity of convertible bond issues has led to greater possible risks for investors unaware of the precise terms under which the security is issued. In 1998, Daimler's special dividend of DM20 per share caused confusion among investors holding the company's convertible bonds, as they struggled to understand the ambiguous wording of what adjustments would be forthcoming on these securities.

In February 2000, Vodafone's takeover of Mannesmann left convertible holders at the mercy of the issuer, as no change of control language existed. These type of events has prompted the ACBM to draw up the current recommendations.

The ACBM claimed it has tried to achieve a fair balance between protecting the interests of the investors and the issuers. The terms are guided by the principle of ‘fair treatment’ for the investor but without hampering the innovation and creativity of the deal structure.

The terms have been generally worded to allow issuers and their lawyers flexibility in drafting convertible prospectuses. But the ACBM will ensure that best practice, material terms and prospectus standards are met by issuers.

Effectively, all material terms in a convertible issue should be contained in the prospectus and investors should not have to look at other documents like deeds of trust. These material terms should include details on conversion periods, redemptions and change of control at the time of launch. They should also be made on a standardised basis.

The standards will not be mandatory, but it is hoped that issuers will adopt them in their own self interest to appear concerned about investor protection. ACBM believes the adoption of such standards would boost overall interest in convertible products.