Convertible securities are "products" that can be converted into other securities. The conversion is carried out under conditions and at predetermined prices on the issue date. Several types of convertible securities are traded on TASE, including option warrants and convertible bonds.
A warrant is a convertible security that allows the purchase of a share in two installments - at the time of the purchase and upon its realization (conversion) per share. The option warrant gives the holder the right to purchase a share at a predetermined price published in the Company's prospectus ("the exercise price").
- If the exercise price is lower than the share price in the market - it would be more profitable for the investor to exercise the options
- If the exercise price is higher than the share price in the market - It would not be profitable for the investor not to exercise the option
Each warrant traded on a stock exchange has a limited life span, usually between one and four years, after which it expires.
A stock obtained from the exercise of a warrant is a new stock that the company issues for the investor. The exercise of the option for the company is the raising of additional money. The option holder may exercise his right during the life of the option. At the end of the life of the option, its validity expires, it cannot be converted into a share and cannot be traded.
There are also options that allow conversion to other securities, such as bonds or convertible bonds.
A call option gives its holder the right to purchase a share at a predetermined price for a limited period of time. In this case, however, the share obtained at exercise is an existing share held by another shareholder. Upon exercise, the share is transferred from its owners to the entity exercising the purchase option. For example, when El-Al was privatized, the government issued shares and call options, which were ultimately exercised and completed privatization.
A convertible bond is, in effect, a bond combined with an option convertible into a share. The conversion is carried out according to a predetermined ratio and published in the prospectus, which reflects the number of convertible bonds that must be converted in order to receive one share (the "Conversion Ratio") The advantage of convertible bonds is that they combine a chance of profit on the stock track, with the share rising, with limited risk in the bond track, when the stock falls.
Convertible bonds also have a limited and known lifetime, at the end of which the investor can receive the investment back plus the interest payments owed to holders of ordinary bonds or convert the bonds into shares at the conversion rate. The issue of convertible bonds enables the company to raise loans at lower interest rates than regular bonds due to the additional option that the investor receives.