convertible security

Case Study In 2006, giant real estate investment trust Equity Office Properties Trust issued $1.5 billion in debt convertible into the firm's common stock. The issue was unusual not only because of its large amount of borrowing, but also because of the purpose of the issue—raising cash that would be used to repurchase the firm's own common stock. The company was issuing a security convertible into common stock in order to raise funds to reduce the number of shares of common stock. The issue carried a 4% coupon and was convertible into common stock at a price of $43 per share. The proceeds of the issue were used to repurchase 17.2 million shares at the current market price of $36.21. Essentially the company was able to acquire stock for debt that would eventually be converted into stock at a price more advantageous to the company. The downside was the firm incurred an additional $1.5 billion of debt and was obligated to pay $60 million more in annual interest expense. A private equity company acquired the firm for over $50 per share the following year.