Exchangeable Bond

Exchangeable Bond (EB) A bond with the right to exchange for securities held by the issuer of the corporate bond. Since any security qualifies, even the issuing company's own shares can be the exchange target. Article 176-13 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (Presidential Decree No. 21291, partially amended on Feb. 3, 2009) limited exchangeable securities to listed securities, but the revised Commercial Act does not limit exchangeable securities to listed securities.

Of course, the bond is extinguished upon exchange. That is, if you take shares, you cannot receive money. In simple terms, at maturity you can either get your money back or receive the shares the company offered in advance. At maturity, the bondholder can choose whichever is more favorable: if the stock has risen, take the shares; if it has fallen, simply demand repayment in cash.

The ability to demand shares instead of cash is similar to a convertible bond (CB). The differences are as follows.

Since already-issued shares are delivered, it is not a capital increase. Therefore, capital does not increase, and no stock listing procedure is needed.

The issuing company must deposit the exchangeable securities with the Korea Securities Depository until the exchange request period expires. When the deposited exchangeable bond is requested for exchange, the Depository delivers the exchange target shares via account transfer.

It is also somewhat similar to a bond with warrant (BW) in that shares can be received, but the difference is that no additional funds are needed when the bondholder exercises the right. That is, with a BW, the bondholder must pay the share price when exercising the right (though the bond itself is repaid in cash), whereas with an exchangeable bond, simply receiving shares instead of the bond is enough.

Exchangeable bonds are relatively rare.