Bonds redeemable in shares (Obligations remboursables en actions - ORA) are a type of hybrid financial instrument commonly used in France. These bonds give the issuer the option to repay the debt by delivering a predetermined number of shares instead of cash. This feature provides the issuer with more flexibility and can be advantageous under certain market conditions.

Characteristics of ORA

1. Conversion Option: ORAs typically contain a clause that allows the issuer to convert the bond into equity at maturity, or at specific times during the bond's life.
2. Interest Payments: Like traditional bonds, ORAs pay periodic interest to bondholders. However, the interest rate may be lower than standard bonds due to the embedded conversion option.
3. Conversion Terms: The number of shares to be received upon conversion is usually fixed at the time of issuance. This can be advantageous for the bondholder if the issuer's share price increases over time.
4. Risk and Reward: ORAs offer bondholders the potential upside of equity ownership while also providing regular interest payments. Conversely, they carry the risk of the issuer’s share price declining, which could result in a less favorable conversion value.

Usage in France

In France, ORAs are often used by companies to raise capital without immediately diluting their equity base. They are also attractive to investors seeking a combination of fixed income and equity exposure.

Regulatory Framework

The issuance and management of ORAs in France are regulated by the Autorité des marchés financiers (the French financial market authority) and must comply with the French monetary and financial code (Code monétaire et financier). Companies must ensure transparency and provide detailed information to investors about the terms and conditions of the bonds.

Advantages for Issuers

1. Flexibility in Repayment: Issuers can conserve cash by opting to repay in shares.
2. Potential Lower Cost of Capital: Due to the conversion feature, interest rates on ORAs can be lower compared to traditional bonds.
3. Deferred Equity Dilution: Immediate dilution of equity is avoided, potentially leading to better terms for existing shareholders.

Advantages for Investors

1. Interest Income: Investors receive regular interest payments, providing a steady income stream.
2. Equity Participation: Potential to participate in the equity upside if the issuer's share price increases.
3. Downside Protection: In case of issuer insolvency, bondholders generally have a higher claim on assets compared to shareholders.

Example Calculation

Suppose a company issues an ORA with a face value of €1,000, a 3% annual interest rate, and a conversion ratio of 50 shares per bond. If the company's share price at maturity is €25, the bondholder can convert the bond into shares worth €1,250 (€25 x 50 shares), thereby realizing a gain.

Conclusion

Obligations remboursables en actions are a versatile financing tool in the French market, offering benefits to both issuers and investors. Understanding the specific terms and market conditions is crucial for maximizing the advantages of this hybrid instrument.