Provisional Call Feature
A provisional call feature allows an issuer, usually of convertible securities, to redeem (call back) the issue during a non-call period if certain criteria, such as a price threshold, are reached. For example, a convertible bond may allow a provisional call of the issue if the underlying common stock trades at 120% of the conversion price for 30 consecutive days. A provisional call feature allows an issuer, usually of convertible securities, to redeem (call back) the issue during a non-call period if certain criteria, such as a price threshold, are reached. Soft call provisional protection is when the bonds can be called subject to the share price of the underlying common stock being above a certain level. A provisional call feature gives an issuer the right to accelerate the first redemption date if the underlying common stock trades at, or above, a pre-determined level for an extended period of time.
What Is a Provisional Call Feature?
A provisional call feature allows an issuer, usually of convertible securities, to redeem (call back) the issue during a non-call period if certain criteria, such as a price threshold, are reached.
Normal call features found in callable bonds may only be exercised, typically, after a set period such as 10 after years from issue.
Understanding Provisional Call Features
A provisional call feature gives an issuer the right to accelerate the first redemption date if the underlying common stock trades at, or above, a pre-determined level for an extended period of time. They are intended to protect an issuer from being forced to honor the conversion, say of a convertible bond into common stock, at a price that is unfavorable.
For example, a convertible bond may allow a provisional call of the issue if the underlying common stock trades at 120% of the conversion price for 30 consecutive days. This percentage, or multiple, of the conversion price, is known as the trigger price because it triggers the conversion. Typically, the terms of a provisional call are 150% of the conversion price for 20 successive days.
Call protection is important for investors because it guarantees the optionality of the convertible, along with any yield advantage it might have over the underlying shares for a fixed period of time. Typically, the greater the length of the call protection, the greater the benefit for investors.
There are two types of call protection: hard call and soft call provision. Most convertible bonds are issued with a hard-call provision, which protects bondholders from having their bonds called before a certain time has elapsed. During the hard-call protection period, a bond cannot be called under any circumstances. Convertible bonds may carry a provisional soft call feature in addition to or in place of hard call protection. Soft call provisional protection is when the bonds can be called subject to the share price of the underlying common stock being above a certain level.
Pros and Cons of a Provisional Call Feature
Investors should carefully consider the advantages and disadvantages of a security’s call feature before investing:
Related terms:
Callable Security
A callable security is a security with an embedded call provision that allows the issuer to repurchase or redeem the security by a specified date. read more
Callable Bond
A callable bond is a bond that can be redeemed (called in) by the issuer prior to its maturity. read more
Common Stock
Common stock is a security that represents ownership in a corporation. read more
Conversion Price & Example
The conversion price is the price per share at which a convertible security, like corporate bonds or preferred shares, can be converted into common stock. read more
Convertible Security
A convertible security is an investment that can be changed into another form, such as convertible preferred stock that converts to common stock. read more
Convertible Bond
A convertible bond is a fixed-income debt security that pays interest, but can be converted into common stock or equity shares.There are several risks read more
Embedded Option
An embedded option is a component of a financial security that gives the issuer or the holder the right to take a specified action in the future. read more
Hard Call Protection
Hard call protection is a provision in a callable bond whereby the issuer cannot exercise the call and redeem the bond before the specified date. read more
Issuer
An issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations. read more
Liquid Yield Option Note (LYON)
A liquid yield option note (LYON) is a form of zero-coupon convertible bond that can be converted to common stock by either the holder or issuer. read more