Last Coupon Before Converting

For convertible arbitrage, it is very important to determine whether holders get the last coupon prior to being called. In almost all cases, if you decide to convert in between interest payment dates, you don’t get the income accrued since the last payment.

Look under Article 12 Conversion. Under conversion procedure, there will be a clause that says whether you get the coupon.

The indenture will state as follows,

Upon conversion, a Holder will not receive any separate cash payment for accrued and unpaid interest …. As a result, accrued and unpaid interest to, but not including, the Conversion Date shall be deemed to be paid in full rather than cancelled, extinguished or forfeited.

In the case where you convert after the record date but before the interest payment date, you will normally have to pay back (upon conversion) the interest you receive as a result of being a record date holder.

If Securities are converted after the close of business on a record date, Holders of such Securities as of the close of business on the record date will receive the interest payable on such Securities on the corresponding Interest Payment Date notwithstanding the conversion. Securities surrendered for conversion during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date must be accompanied by payment of an amount equal to the interest payable on the Securities so converted;

There may be some exceptions to this clause. The main exception is upon a call-forced conversion (that is, when the issuer calls a convertible whose parity is above the call price and holders are forced to convert to get the higher value) during the period between the record and payment dates for the interest. This is for convertibles that have call dates prior to maturity dates. The other exception is if a change of control date falls in between the record and payment dates.

You will find a clause similar to the following,

provided, however, that no such payment need be made (1) if the Company has specified a Fundamental Change Repurchase Date that is after a record date and on or prior to the corresponding Interest Payment Date, (2) for conversions following the Regular Record Date immediately preceding the final Interest Payment Date for the Securities, (3) if the Company has called the Securities for redemption or (4) to the extent of any overdue interest or Additional Interest, if any, existing at the time of conversion with respect to such Security. Except as described above, no payment or adjustment will be made for accrued interest on converted Securities.

For converts that are in-the-money at maturity, the situation is a bit cloudy. Some indentures will allow you to keep the last coupon while others will not.

For example, in the case of EMC, you get the last coupon prior to maturity.

(i) Upon conversion, a Holder will not receive any separate cash payment for accrued and unpaid interest except as set forth below. The Company’s settlement of the Conversion Obligations as described above shall be deemed to satisfy its obligation to pay the principal amount of the Security and accrued and unpaid interest to, but not including, the Conversion Date. As a result, accrued and unpaid interest to, but not including, the Conversion Date shall be deemed to be paid in full rather than cancelled, extinguished or forfeited.

Notwithstanding the preceding sentence, if Securities are converted after the close of business on a record date, Holders of such Securities as of the close of business on the record date will receive the interest payable on such Securities on the corresponding Interest Payment Date notwithstanding the conversion. Securities surrendered for conversion during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date must be accompanied by payment of an amount equal to the interest payable on the Securities so converted; provided, however, that no such payment need be made (i) if the Company has specified a Designated Event Purchase Date that is after a Record Date and on or prior to the corresponding Interest Payment Date; (ii) to the extent of any overdue interest existing at the time of conversion with respect to such Security; or (iii) with respect to any Conversion Date that occurs during the period from the close of business on the Regular Record Date immediately preceding Stated Maturity to Stated Maturity. Except as described above, no payment or adjustment will be made for accrued interest on converted Securities.

In the case of FCN, the indenture (Article 8 Conversion, section 8.03), the indenture says the only exception is the fundamental change and does not mention the call or maturity.

(b) Each Definitive Note surrendered (in whole or in part), or beneficial interest in any Global Note surrendered to the Conversion Agent, for conversion during the Record Date Period shall be accompanied by payment in same-day funds or other funds acceptable to the Company of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of such Note (or part thereof, as the case may be) being surrendered for conversion; provided, however, that no such payment need be made in the case of any Note or portion thereof that is subject to repurchase following a Fundamental Change on a Fundamental Change Repurchase Date occurring during the Record Date Period (or if such interest payment date is not a Business Day, the second Business Day after the interest payment date) and, as a result, the right to convert such Note would otherwise terminate in such Record Date Period if not exercised. The interest so payable on such Interest Payment Date with respect to any Note (or portion thereof, if applicable) that is surrendered for conversion during the Record Date Period shall be paid to the Holder of such Note as of such Regular Record Date in an amount equal to the interest that would have been payable on such Note if such Note had been converted as of the close of business on such Interest Payment Date. Interest payable on any Interest Payment Date in respect of any Note surrendered for conversion on or after such Interest Payment Date shall be paid to the Holder of such Note as of the Regular Record Date immediately preceding such Interest Payment Date, notwithstanding the exercise of the right of conversion.