Extendible Securities
Advisories
November 24, 2009 Posted by: Melina Hadiwono
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December 21, 2009 Posted by: Melina HadiwonoGiven the relative newness of these securities, we are not convinced that a real secondary market for the debt exists. A strong supply and demand in the secondary market is necessary to create the kind of liquidity we want to see for investments in our client portfolios. Currently, we don’t see either. If an investor in an extendible security wants immediate liquidity, we see a real potential for principal loss.
While these types of securities have mandatory tender option to the issuers, investors need to have the ability to hold them until the extended mandatory purchase date, which typically can go up to one year.
Since these securities typically do not have external bank support agreement and rely on the issuer’s creditworthiness, dedicated expertise and resources are required to conduct ongoing due diligence on the issuer’s ability to honor the commitment.
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Given the relative newness of these securities, we are not convinced that a real secondary market for the debt exists. A strong supply and demand in the secondary market is necessary to create the kind of liquidity we want to see for investments in our client portfolios. Currently, we don’t see either. If an investor in an extendible security wants immediate liquidity, we see a real potential for principal loss.
While these types of securities have mandatory tender option to the issuers, investors need to have the ability to hold them until the extended mandatory purchase date, which typically can go up to one year.
Since these securities typically do not have external bank support agreement and rely on the issuer’s creditworthiness, dedicated expertise and resources are required to conduct ongoing due diligence on the issuer’s ability to honor the commitment.
Download the article (PDF)