Mandatory Convertible

A type of convertible bond that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying common stock.

These securities provide investors with higher yields to compensate holders for the mandatory conversion structure.

Investopedia Says:
These are often used when a traditional equity issuance would otherwise place severe market pressure on the underlying stock.

Related Links:
Find out about the nuts and bolts, pros and cons of investing in bonds. Convertible Bonds: An Introduction
These securities offer an answer for investors who want the profit potential of stocks but not the risk. Introduction To Convertible Preferred Shares

Debt-equity hybrids that became popular in the 1980s to meet the strong demand by banks for the raising of capital. One type, equity contract notes, is exchangeable at maturity for common stock having a market value equal to the principal amount of the notes. If the holder of the notes does not choose to receive equities at maturity, the issuer will sell the equity on behalf of the holder. Another type, equity commitment notes, does not require the holder to purchase equity with the notes but rather commits the issuer to redeem the notes with the proceeds of an equity issue at some future date. The Federal Reserve requires issuers to fund a third of the equity in the first four years, another third in the second four years, and the balance by maturity in the third four years. Caps are still another form of mandatory convertible.

Type of bond with a redemption requirement. Banks issue mandatory convertible bonds, also called equity linked securities, to meet regulatory capital requirements without issuing common stock until some future date. The bonds often pay higher yields than comparable bonds to compensate for the mandatory conversion feature.