12 February 2016
We've noted that the recent LVMH issue has been causing some confusion, specifically regarding the correct way to deal with the cross-currency impact on the conversion option.
We believe holders should view the conversion payoff as analogous to a US$ Bond + EUR Warrant style payoff, such as the Siemens 1.05% Aug-2017s. On exercise, holders effectively receive a fixed $ bond par amount but pay a variable $ amount to exercise the warrant (fixed EUR strike converted into $ at the spot FX rate). This means that as the forward FX changes, the US$ cash value of the "bond" may be smaller (or larger) that the amount needed to exercise, resulting in a cash "payment" (or surplus).
From the summary terms, on conversion the issuer will only deliver a cash amount, calculated as the sum of the Daily Cash Amounts over a 30-day period. If we ignore the averaging involved, the cash amount is calculated according to the following formula:
Cash Amount = NV + ( CR x P - EP ) x PR
NV = Nominal Value
P = share Price (VWAP)
EP = Exercise Price (NV * Fixed FX)
CR = Conversion Ratio
PR = Prevailing Rate at conversion
Rearranging and expanding gives:
Cash Amount = ( CR x P x PR ) + ( NV - EP x PR )
the first part of the expression representing the usual Composite cross currency payoff, while the second gives the difference between the US$ Nominal Value and the fixed Euro strike converted into US$ at the prevailing FX at the time of conversion. We illustrate this below.
In the chart we compare the LVMH payoff at maturity with both the regular Composite and Quanto cross-currency payoff, assuming (purely in the interests of highlighting the differences) a significant 50% appreciation in the Euro.
In version 13, Monis allows these type of instruments to be explicitly modelled as either simulated (e.g. LVMH) or detachable (e.g. Siemens) Bond plus Warrant conversion payoff convertibles, and the Monis Data Service fully supports this approach.
In earlier versions, MDS provides data to support a close approximation to this particular conversion payoff. Instruments are setup as Composite cross-currency convertibles, per the first component of the payoff expression, while the second component of the conversion value expression is modelled using a "Cash Amount Paid by holder" (on the conversion tab). This we calculate as the difference between the bond currency nominal value (or bond floor in the detachable case) and the share currency warrant exercise price * forward FX rate, giving the expected difference at conversion expiry.
|Name||Bond + Warrant Type||Bond NV||"Warrant" EP|
|LVMH 0.000% 16-Feb-2021||Simulated||USD 250||EUR 222.4991|
|Valeo 0.000% 16-Jun-2021||Simulated||USD 200000||EUR 177528|
|Michelin 0.000% 10-Jan-2022||Simulated||USD 200000||EUR 188499|
|Vinci 0.375% 16-Feb-2022||Simulated||USD 200000||EUR 188773|
|Carrefour 0.000% 14-Jun-2023||Simulated||USD 200000||EUR 178738|
|Dufry / JP Morgan 0.000% 11-Jan-2021||Simulated||USD 200000||CHF 195507|
|Michelin 0.000% 10-Nov-2023||Simulated||USD 200000||EUR 164982.4706|
|Siemens 1.650% 16-Aug-2019 (exch)||Detachable||USD 250000||EUR 187842.8|
|Brenntag 1.875% 02-Dec-2022||Detachable||USD 250000||EUR 236027|
|BASF 0.925% 09-Mar-2023||Detachable||USD 250000||EUR 237192|
|GN Store Nord 0.000% 31-May-2022||Detachable (modelled as Simulated for valn. purposes)||EUR 100000||DKK 744400|
If you would like to discuss this, or any other aspect of the Monis Data Service, please feel free to contact us at Monis support or on +44 (0)20 8081 2700.
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