Convertibles in Spain: An Example of 'Back Door' Equity Financing

Abstract

Spanish convertible bonds are different from the American convertible bonds. First, the conversion price is not fixed in pesetas, but is defined as a percentage discount off the average share price over a number of days before conversion. Second, the conversion option can be exercised only at a few (usually two or three) different dates. Third, the first conversion opportunity is usually only two or three months after the subscription (issue) date. These characteristics allow us to say that convertible bonds in Spain have been used for "Back Door" equity financing. In fact, more than 80% of the convertibles were converted. In the period 1984 to 1996, 290 issues of convertibles accounted for $20 billion. In this period, companies issued more convertibles than new shares ($19 billion). Several formulas to value Spanish convertible bonds are derived using option theory. Convertibles have been undervalued by an average of 21.6% on average. The expropriation effect in the period 1984 to 1995 accounts for $1.15 billion.