DEFINITION of 'Compulsory Convertible Debenture - CCD'

Compulsory Convertible Debenture (CCD) is a type of debenture in which the whole value of the debenture must be converted into equity by a specified time. A CCD can be classified as a hybrid security, meaning it is neither considered pure debit nor pure equity.

BREAKING DOWN 'Compulsory Convertible Debenture - CCD'

A debenture is a medium- to long-term debt security issued by companies to borrow money from investors at a fixed interest rate, though they are not secured by physical assets or collateral. These instruments are only backed by the full faith and credit of the issuing company. In effect, an unsecured corporate bond is a debenture. Debenture holders receive interest payments periodically, and are repaid their principal investment at maturity.

A debenture comes in two forms – non-convertible and convertible. A non-convertible debenture is one that cannot be converted into the equity shares of the issuing company. Since there’s no convertibility feature on these types of debentures, the interest rate attached to them is higher than convertible debentures. Convertible debentures, on the other hand, can be converted into the company’s equity after a predetermined period of time. Since there is a perceived advantage of converting these fixed income securities into an ownership stake in the firm, investors are willing to accept a lower interest rate for purchasing convertible debentures.

One form of convertible debentures is the compulsory convertible debentures (CCD). The main difference between compulsory convertible debentures and other convertible securities is that owners of the CCD must convert their debentures into equity, whereas in other types of convertible securities, the owners of the debenture are given the option to convert. Debenture holders have no rights to vote in the company's general meetings of shareholders, but once the compulsory convertible debenture is converted into equity shares, the debenture holders automatically become shareholders in the company and acquire all the rights of shareholders.

The compulsory conversion of debentures to equity is, in fact, a method used by a company to pay off its debt by paying its debenture holders in kind, that is, equity. The payment in kind consists of repayment of principal and payment of interest. There are two types of conversion prices. The first conversion price would limit the price to the equivalent of the security’s par value back in shares. The second would delimit where the investor will earn more than par. The compulsory convertible debenture's ratio of conversion is decided by the issuer when the debenture is issued. The conversion ratio is the number of shares each debenture converts into, and may be expressed per bond or on a per centum (per 100) basis.

Some CCDs, which are usually considered equity, are structured in a manner that makes them more like debt. Often, the investor has a put option which requires the issuing companies to buy back shares at a fixed price. Unlike pure debt issues, such as corporate bonds, compulsory convertible debentures do not pose a credit risk later for the company issuing them since they eventually convert to equity. In addition, CCDs also mitigate some of the downward pressure a pure equity issuance would place on the underlying stock since they are not immediately converted to shares.

  1. Partially Convertible Debenture ...

    A partially convertible debenture is a type of convertible debenture, ...
  2. Debenture Redemption Reserve

    A debenture redemption reserve is a provision that states that ...
  3. Convertible Hedge

    A convertible hedge is a strategy where an investor purchases ...
  4. Hung Convertibles

    Convertible securities that are very unlikely to be converted ...
  5. Agency Debentures

    Agency debentures are debt issued by either a federal agency ...
  6. Premium Adjustable Convertible ...

    A premium Adjustable Convertible Security - PEACS combines a ...
Related Articles
  1. Investing

    An Introduction to Convertible Bonds

    Getting caught up in all the details and intricacies of convertible bonds can make them appear more complex than they really are.
  2. Investing

    The Top 6 Convertible Bond Funds for 2016

    Take a look at convertible bond mutual funds that are well-positioned heading into 2016, and why investors might consider a convertible fund portfolio.
  3. Investing

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  4. Investing

    Can a Bond ETF Work in a Rising Rate Environment?

    The CWB Convertible Securities ETF could be the perfect solution for a rising rate environment.
  5. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  6. Investing

    CWB: SPDR Barclays Convertible Secs ETF

    Read an in-depth analysis of the SPDR Barclays Capital Convertible Bond ETF, which tracks an index of high-growth potential convertible bonds.
  7. Insights

    BlackBerry to Sell $605 Million of Convertible Debt to Fairfax (BBRY, FRFHF)

    Amid a shrinking hold on a weak smartphone market, BlackBerry continues to build out its money-losing handset business while shifting focus to software.
  8. Retirement

    Converting a Traditional IRA to a Roth

    When is it a good idea to convert traditional IRA funds into Roth IRA funds? And when does it not make sense?
  1. How is a debenture stock different from a regular debenture?

    Learn to differentiate between standard debentures and debenture stocks, which are equities that act more like preferred ... Read Answer >>
  2. Preference shares vs. debentures

    Learn why preference shares are equity securities and debentures are debt securities. Understand the differences between ... Read Answer >>
  3. Nonconvertible debentures versus fixed deposits

    Nonconvertible debentures and fixed deposits are two different ways of investing money. Learn about the differences in how ... Read Answer >>
  4. Where Does Stock From Convertible Bonds Come From?

    Find out how a debt instrument converts into shares of the issuer's common stock, at a set price and usually by a set date. ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center