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What is Convertible Loan Stock?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2016
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    2003-2016
    Conjecture Corporation
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Convertible loan stock is a form of loan stock that is used as collateral for a loan and may be converted into ordinary shares at specific times during the course of the loan. In most cases, convertible loan stocks are associated with loans that carry a fixed interest rate. Sometimes known as portfolio loan stock financing, this approach makes it possible to secure a loan and provide the benefit of converting the shares at a later date, if that approach will benefit both the lender and the debtor.

One of the benefits associated with convertible loan stock is that the debtor can often obtain a competitive rate of interest on the loan. Since the rates are usually fixed, this means that the debtor can lock in a very good rate and not be overly concerned about any shifts in the average fixed interest rates during the course of the loan. This makes the loan very much like any type of lending arrangement that makes use of a fixed rate. The difference is that the terms and conditions found in the loan contract provide for converting the loan stock to common shares if certain conditions should come to pass, a move that helps to protect the interests of both the lender and the debtor.

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As part of the structure of convertible loan stock, the conversion rate associated with the loan stock is identified in the terms and conditions. This makes it possible for both parties to understand exactly what type of return is generated if and when the conversion of the convertible loan stock takes place. The provisions will also provide specific guidelines in terms of what circumstances must prevail in order for the conversion to be triggered, as well as identify when in the life of the loan the conversion can take place. Using this type of dual approach to the conversion potential, both the interests of the lender and the debtor are protected.

It is important to note that convertible loan stock does not necessary mean that the conversion must occur at some point before the loan is settled. If conditions never materialize that call for the conversion to take place, and neither the lender nor the debtor are interested in attempting to manage a conversion, the loan can continue with the debtor making regular payments according to the schedule defined in the loan contract. As long as the loan is in good standing and no situations arise that would merit the implementation of the conversion, the debtor continues to make payments and the lender enjoys the fixed rate of interest assigned to the secured loan.

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