Hung Convertibles

DEFINITION of 'Hung Convertibles'

Convertible securities that are very unlikely to be converted into common stock of the underlying issuer, usually because the share price is well below the conversion price. Hung convertibles can also result if the issuer is unable to force conversion until the underlying common stock reaches a pre-defined price level, or because the call date is still far away. Because of their limited prospects for conversion, hung convertibles trade as debt instruments rather than quasi-equity.

BREAKING DOWN 'Hung Convertibles'

For example, consider a convertible debenture with a face value of $1,000 that can be converted into 100 shares, for a conversion price of $10. If the price of the underlying stock is $4, this debenture would be considered a hung convertible, especially if it matures in a relatively short period of time. Such a debenture would therefore be priced as a debt instrument, with its pricing determined by a number of factors including its coupon rate, maturity, current market interest rates and yields, and the issuer's credit rating.