EXH: Long averaging period before maturity

For the EXH 4.25% convertible bonds due March 15, 2014, watch the conversion language prior to maturity. If the relevant conversion date occurs on or after March 15, 2014, and regardless of the settlement method, the observation period will be, “the 40 consecutive trading days beginning on and including the 42nd schedule trading day immediately preceding the maturity date.”

This effective takes away about 2 months of optionality because the number of shares you get will start to get fixed as you pass the observation period. For example if EXH drops 20% on the 20th day into the observation period, and EXH has elected to cash settle, the number of shares they will give you has already started to be determined. You would already have to had begun your stock buy backs in an arb position.

Many converts that mature have averaging periods that start before the maturity date if you convert whereas converts with put/call dates have averaging periods that start after you convert.

It is preferable to have the averaging period start after the maturity or put date. The shorter the averaging period the better.

One exception is that if the convert trades close to par, you could still have some optionality through the averaging period as you do not have to make the option to convert until right before maturity. There is a look back.

You will see some converts trade below parity as you go through the averaging period if the stock runs such as NTAP prior to maturity since your averaging period parity is lower.

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