Convertible rights

Also known as ‘conversion rights’, these give the buyer of a preference share or bond the right to convert it into a set number of ordinary shares for a pre-agreed ‘strike’ price at an agreed point in the future. For the issuer, the main advantage is that by offering convertible rights, which can be exercised after, say, five years, they can pay a lower dividend or coupon in the meantime. For the holder, conversion rights are a chance to make a windfall gain sometime in the future, provided the issuer’s ordinary shares are trading above the strike price when the option is taken. If this isn’t the case, the issuer is often obliged to buy back the preference shares or bonds for a pre-agreed cash price.