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. Fully Convertible Debenture - FCD

    A fully convertible debenture is a debt security in which the ...
  2. Convertible Hedge

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

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

    Agency debentures are debt issued by either a federal agency ...
  5. Convertibles

    Securities, such as bonds, that can be turned into common stock ...
  6. If-Converted Method

    A method used to calculate the share impact of convertible securities ...
Related Articles
  1. 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.
  2. Investing

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  3. Investing

    The Top 3 Convertible Bond ETFs for 2016 (CWB, ICVT)

    Obtain detailed information on the exchange-traded funds (ETFs) available for traders seeking ETF exposure to convertible bond investments.
  4. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  5. 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.
  6. Investing

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  7. Investing

    Update: Major Convertible Securities ETF (CWB)

    CWB is an interesting and liquid ETF investment option for investors seeking to increase exposure to U.S. convertible bonds.
  8. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  1. 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 >>
  2. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
  3. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center