Convertible Bonds in Turkey
According to Turkish Law, the main provisions of convertible bonds are regulated in the Communiqué on Debt Securities. Communiqué was made by Capital Market Board (CMB) (Sermaye Piyasası Kurulu) in 2013 and some amendments were made regarding the provisions.
Convertible bonds is one of the debt securities that the companies can use to provide the funds. Communiqué defines the convertible bonds as debt securities, granting its holders with the right to convert the bond into issuer’s stocks either by capital increase or by other ways designated in the prospectus or the offering memorandum. The bond holder can either receive the nominal value and the interest of the bond or obtain the shares of the issuer by using the right to convert the bond. Thus, convertible bonds are hybrid securities that combine features of debt securities and equity securities.
In the Communiqué, firstly, the maturity of convertible bonds is regulated. According to Article 17/1 of the Communiqué, the maturity of the convertible bonds cannot be less than 365 days. The earliest time that a convertible bond can be converted into shares is 365 days following the beginning date of maturity.
The conversion of the convertible bonds to the stocks is made depending on the nominal value of the convertible bonds. In addition, provided that it is stated in the prospectus or issuance certificate, the amount of interest payable on the conversion date would be also added to the nominal value of the convertible bonds. In other words, if the parties have previously agreed on this situation in the prospectus or issuance certificate, the bond holders may have more stocks by adding the amount of interest payable to the nominal value. All of the expenses resulting from the conversion belong to the issuer.
In the article 17/5 of the Communiqué, there is a special regulation on the sale of convertible bonds to be offered to the public. According to this article, if the convertible bonds are intended to be offered to public, the issuer shall be listed with the stock exchange, subject to the registered capital system and board of directors should be authorized with the limitation of pre-emptive rights by the Articles of Association.
The general rule for meeting the request for conversion is specified in Article 19/3 of the Communiqué. According to this, the conversion request will be met with capital increase by the issuer. Converting bonds into stocks is, in principal, made through increasing the capital. In other words, publicly traded and non-public corporations will increase their capital for the bond holders to use their conversion rights.
As well as the capital increase is the general basis, it will be possible to obtain the right of conversion without the capital increase before the maturity date (i) with the request of the cooparation (issuer) or (ii) with the request of the bond holders.
The bond holders who do not use their rights to convert their bonds with stocks, despite the properly performance of the issuer, lose their rights to convert and receive the nominal value and accrued interest for the bonds they hold.
Conversion Price and Rate
–––Article 18 of the Communiqué regulates the conversion price and conversion rate if the right of conversion is used by the bond holders. According to provision, conversion price is the price that will be applied to the stocks while calculating the amount of stocks to be given to the bond holders, if the convertible bond holders convert their bonds to the stocks. On the other hand, the conversion rate indicates the number of stocks to be given to the bond holders in exchange for the nominal value of the convertible bonds. The report regarding the conversion rate for convertible bonds issued through a public offering is prepared when the prospectus for such bonds is submitted to the CMB for approval.
The conversion transactions cannot be made to the detriment of the issuer and its existing shareholders.
If the stock price is affected by capital increase, payment of dividend etc. within the maturity of convertible bonds, the adjusted prices are taken as basis in determination of the conversion rate. This new conversion rate is disclosed by the issuer in the Public Disclosure Platform (Kamuyu Aydınlatma Platformu-KAP).
Conversion Types of Convertible Bonds
In accordance with the relevant provisions of the Communiqué, convertible bonds would be redeemed through conversion to shares on the maturity date or before the maturity. Conversion of convertible bonds can happen due to a redemption plan, due to the request of the corporation and due to the request of the convertible bond holders before the maturity date.
Conversion through a Redemption Plan: In the case of a redemption plan, the capital can be increased either with or without book-building (Talep Toplama Süreci).
With regards to the conversion process without book building, the issuer perfoms a capital increase and all convertible bond holders may convert their bonds into stocks by using their rights of conversion within the conversion period. The bond holders, on the other hand, may choose to receive their principal investment as well as accrued interest. If convertible bond holders do not apply for converting their bonds into stocks within the conversion period, their intention would be deemed as payment of the principle investment with the accrued interest and those investors would be paid in cash at the end of the specified conversion period.
In case of a conversion process with book building, the corporations are obliged to make a disclosure through Public Disclosure Platform at least fifteen days before book building period regarding conversion. The book building period of conversion cannot be more than ten working days. The issuer at the end of the book building period, performs the capital increase and offers the stocks to the bond holders. All legal rights of the convertible bond holders not requested for conversion shall remain.
Conversions at the Request of the Corporation: The convertible bonds, wholly or patially, can be converted into shares prior to the due date depending on the request of the issuer. The issuer must make an announcement regarding the conversion offer on Public Disclosure Platform fifteen days prior to the beginning of the book-building period. The conversion period cannot exceed 10 business days. If the convertible bond holders do not request for the conversion of their bonds within the specified time period, their intention would be deemed as payment of the principle investment with the accrued interest and those investors would be paid in cash at the end of the specified conversion period.
The issuer may choose not to increase its capital in cases where the stocks to be delivered to convertible bond holders are less than five per cent of the total amount of the stocks of the issuer.
Conversions at the Request of the Convertible Bond Owners: The convertible bonds would be, wholly or partially, converted into shares at the request of the convertible bond holders before due date. Convertible bond holders, who want to use their conversion right, shall inform the issuer at least one month before the dates determined in prospectus regarding the convertible bonds issue. This notification must be performed through an authorized institution.
The issuer, (if it is a public company), may choose not to increase its capital, in the event that the ratio of the number of shares offered to the convertible bond holders to the total amount of stocks of the issuer is below five percent.
The issuer is responsible for the fulfillment of conversion procedure.
Advantages and Disadvantages of Convertible Bonds
The most important reason for the issuance of convertible bonds is the search of the issuer's funding. The corporations can obtain funds without selling their stocks or getting a bank loan with the high interest rate. Thus, they can meet their capital needs with low cost.
Convertible bonds offer many advantages to the issuers along with the investors who have convertible bonds. First of all, the bond owner has the right to request the price that is lent to the issuer with its interest or to convert the bonds into the issuer’s stocks. Through this optinal right, the bond holders may choose the right to convert their bonds by evaluating the current status of the stocks or request the nominal value of the convertible bonds with its interest. If the bond holders will request the bond value and its interest from the issuer, since this request is independent of whether the issuer can make a profit or not, there will be no serious risk for the bond holders.
When these characteristics of convertible bonds are considered, it is clear that convertible bonds are profitable for both the investor and the issuer. Especially, since convertible bonds have conversion characteristic, their interest rates are lower than other bonds. This situation is advantageous for issuers. Because, instead of getting a loan from banks with high interest rates, issuers can acquire the investors with a much lower interest rate in a short time. On the other hand, as mentioned above, the investors have the right to convert bonds to the stocks, so that they reserve the right to be a shareholder in case of over valuation of stocks. Because, in countries where inflation rate is high, investors can eliminate the risk of losing the value of their money in the long term by using the right to convert.
On the other hand, there is a risk for the bond holders who do not use the right of conversion. These bond holders may not be able to collect their receivables due to the deterioration of the issuer’s situation, bankruptcy or issuer’s request for concordatum. However, these risks are not important when compared to the advantages of convertible bonds. In fact, it is not possible to talk about a completely risk-free investment.
One of the risks regarding the issuers can be considered as the changes that may occur in the structure of issuer’s board of directors, in case the bond holders become the shareholders by using their right to conversion. Nevertheless, the risks can accepted as negligible, when the benefits for issuers are considered.
The Situation of Convertible Bonds in Turkey
The convertible bonds were explicitly regulated for the first time in Article 14 of eSerPK with No. 2499, which entered into force in 1981. Finally, the Communiqué on Debt Securities (VII- 128.8), that has been in force since 2013, which contains amendments dated 18 February 2017 and 8 March 2017 has been published in the offical gazette. However, although convertible bonds are included in the Communiqué, they are not preferred in Turkey as one of the debt securities. In fact, the first convertible bond issuance in Turkey took place at the beginning of 2018. This development is interpreted as a positive one in terms of creating different alternatives for cooparations that are seeking the funds.
In summary, the risks came along with the convertible bonds are rendered acceptable when the advantages provided to the issuer and the investor are taken into consideration., Since the implementation of convertible bonds have recently started in Turkey, the consequences of the regulations related to the convertible bonds, are unclear for both the issuer and the investor.