Who is the issuer?
The first thing you want to look for in the indenture is the issuer.
It seems very straight forward to find the issuer of a convertible bond. However, in certain cases, it can be very deceiving who the issuer is. For example, some companies have a holding company structure where the convert is issued out of the holding company so even though it is a senior bond, it maybe structurally subordinated to other senior debt of the company.
For example, HTZ 5.25% 06/01/2014 convertible bonds are senior notes but they are structurally subordinated to all other senior debt of Hertz which is issued from the operating company. HTZ could have allowed the operating company to guarantee the convertible debt but it chose not to and thus is structurally subordinated.
Ranking
Look in the rankings section of the prospectus. In this section, the issuer will clearly state where the converts rank relative to other debt in the capital structure and whether the converts are structurally subordinated to other debt. Many times, the issuer will detail specifically the debt issues and amounts rank ahead, pari passu, or behind the convertible bonds.
Guarantees
In the case of PCX 3.25% 05/31/13, the converts are senior bonds that are pari passu with the subsequently issued 8.25% senior notes due 2018 straight bonds. However, the straight bonds are guaranteed by operating subsidiaries while that converts do not have guarantees. This puts the PCX 3.25% convert in a structurally subordinate position.
Check the Subordination Analysis page.
The table of contents for a convertible indenture is typically as follows:
Article 1: Definitions
Article 2: Issue, Description, Execution, Registration and Exchange of Notes
Article 3: Satisfaction and Discharge
Article 4: Particular covenants of the company
Article 5: List of Holders
Article 6: Defaults and Remedies
Article 7: Concerning the Trustee
Article 8: Concerning the Holders
Article 9: Holders Meetings
Article 10: Supplemental Indentures
Article 11: Consolidation, Merger, Sale , Conveyance and Lease
Article 12: Immunity of incorporators, Stockholders, Officers, and Directors
Article 13: Conversion of Notes
Article 14: Repurchase of Notes and the option of holders
Article 15: Redemption
Article 17: Miscellaneous Provisions
In older indentures, there could be an Annex section or Exhibit A that contains important payment schedules. So if you don’t find something in the body of the indenture, look for the Annex in the back. These are usually grouped by paragraphs such as the following:
1) Interest
2) Method of Payment
3) Paying Agent, Registrar
4) Indenture. Limitations
5) Optional Redemption
6) Notice of Redemption
7) Purchase of notes at option of holder
8) Conversion