Debt securities are often an efficient and inexpensive resource to finance the balance sheet of companies; however, one of the causes of the global financial crisis was the excessive leverage taken by companies. Hybrid capital instruments share characteristics of equity and debt, and allow companies to finance its balance sheet in a more sustainable way by reducing leverage, but tend to increase its overall cost of capital. Mandatory convertible notes (MCNs) are hybrid financing instruments that are very close to equity; rating agencies assign them a high equity component and are commonly treated as equity by accounting standards. Despite the high nominal coupon that MCNs seem to pay in some cases, a deeper analysis shows that the cost of issuing MCNs can be similar and even lower than the cost of issuing senior debt. This research performs an empirical study of the implicit cost of the MCNs issued between 2010 and 2018. The study shows the relationship between the implicit yield of MCNs, the senior debt yield, and the convertible arbitrage investors. MCNs can be a sustainable capital alternative that offers a reasonable cost not only for high-yield companies but also for well-established investment grade issuers. The access to efficient and not very expensive capital to finance the balance sheet of companies can promote sustainable growth, industrialization, and innovation.

A large proportion of the academic literature about the agency problem focuses on corporate governance or the instruments that can be used to balance the incentives of shareholders and debt holders. Following the real options company valuation framework, one method to increase shareholder value involves increasing the intrinsic risk of the firm; however, such a practice reduces the bondholder value. We analyzed an innovative balance sheet instrument, the mandatory convertible bond, as a means to increase financial sustainability of companies, improving the value for shareholders without increasing the perceived default risk. The results of the empirical analysis illustrate that for companies in a weak credit position, the agency problem can be mitigated by the issuance of mandatory convertible bonds, which allows managers to increase company risk without being detrimental for bondholders. However, when the probability of distress is small, shareholders have less incentive to increase company risk than in a company funded by mandatory convertible bonds, being more aligned with bondholders. A better alignment of debt holders and shareholders incentives reduces inefficiencies, mitigates the probably of distress, and improves the long-term financial sustainability of companies and can promote stable growth and innovation.

Purpose: The purpose of this document is to review the funding options for Microfinance Institutions (MFIs), define the size of the holdings of international investors in MFI equity and in particular the MFIs listed in stock exchanges, analyze the characteristics of these subset of the financial world and study the stock exchange evolution of some listed MFIs amid the financial crisis.

Design/methodology/approach: Since academic literature on listed MFI equity is virtually inexistent, most of the information has been obtained from the World Bank, annual accounts of the listed MFIs, stock exchanges and from equity research documents.

Findings and Originality/value: Microfinance Institutions share several common characteristics that make them a resilient business and the few MFIs that are listed in stock exchanges seem to have performed better in the financial crisis. Microfinance can be considered as one of the new frontiers of the expansion of the global banking industry.

Practical implications: Presently, international for-profit investors have very few ways of investing in microfinance equity. Most of the equity of the MFI equity is funded locally or thanks to the local public sector. The stock exchange listing of the MFIs should drive MFIs towards a more professional management, more transparency and better governance.

Social implications: Microfinance Institutions provide credit to microenterprises in poor countries that have no other alternative sources of external capital to expand its activity. If global investors could easily invest in the listed equity of the MFIs these institutions would expand its lending books and would improve its governance, part of the population living in poor areas or with lower income could ameliorate its standard of living.

Originality/value: The number of Microfinance Institutions that are professionally run like commercial banks is still scarce and even more scarce are the MFI listed in public stock exchanges. Therefore the published literature on the characteristics and performance of the listed equity of the Microfinance Institutions is extremely reduced. But microfinance assets are rapidly growing and MFIs will need to list their equity in stock exchanges to sustain this expansion.

No abstract

Abstract. Mandatory Convertibles Notes (MCNs) mean only a small fraction of all the securities issued by corporate or financial institutions, however, they represent nearly a 30% in volume of the convertible securities issued every year. MCNs share characteristics of equity and debt securities but rating agencies assign them a high equity component and are commonly treated as equity by accounting standards. Despite the high facial coupon that MCNs seem to pay, a deeper analysis shows that the cost of MCN can be lower than the cost of issuing hybrid or subordinated debt and in some cases similar to the cost of issuing senior debt. Mandatory convertibles were profusely issued by financial institutions amid the global crisis as a means to increase capital and could be considered as a predecessor of some types of AT1 and Contingent Convertible. The academic literature about Mandatory Convertibles is scarce and we consider necessary to shed some light on a type of security that can be very useful for the real economy