THE USE OF EXCHANGEABLE BONDS DURING THE PRIVATIZATION PROCESS

Abstract

In our article we present the use of hybrid securities in the privatization process. We show that exchangeable bonds may be successfully applied during privatization of state companies throughout the world. It may be profitable for many reasons. Firstly, the exchangeables offer a much lower coupon in comparison with the ordinary government bonds which may be crucial for highly indebted countries. Secondly, throughout the entire maturity period the state remains the owner of the privatized firm which means that the government can be a beneficiary of high dividends paid by the public enterprises and can actively manage them. Thirdly, in the case of unfavorable market conditions the authorities get an opportunity to wait for the end of economic turmoil in order to avoid selling the equity participations under their true value. Finally, the issue of certain types of exchangeables (e.g. callable exchangeables or mandatory exchangeables) and adding several provisions (e.g. greenshoe option or clean-up call) makes the instrument more flexible for the issuer. We also present a few examples of the privatization processes by means of exchangeable bonds i.a. in Germany and in Austria. Most of such operations, e.g. German Deutsche Post, Austrian Telekom Austria or Portuguese Galp Energia SGPS S.A. were completed with success.