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Encore: Convertible Bond with Call Sprea...

Sinha, Sidharth

Case

Encore: Convertible Bond with Call Spread Overlay

Sinha, Sidharth

IIMA-FA0550 | Published May 16, 2020 | 12 pages Case

Collection: Indian Institute of Management, Ahmedabad

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Learning Objectives

Encore Capital (Encore) has received a proposal for an issue of convertible bonds to Qualified Institutional Buyers (QIBs). Simultaneously, with the issuance of the convertible bond, Encore would purchase a ‘bond hedge’ in the over-the-counter equity derivatives market and sell warrants. The bond hedge and warrants sale constituted the ‘call spread overlay’. Concurrent with the transaction, Encore would also repurchase shares worth $25 million from the proceeds of the convertible bond issue. The security provides an opportunity to discuss the design of an innovative financial security in response to market and issuer requirements.

To understand the implications of specific features of convertible bonds from the issuer and investors’ perspective; Valuation of convertible bonds; Role of convertible bonds in the capital structure vis-a-vis debt and equity.