Parity

Dr D S Prasad
Summary of the principal features of
the bond offering
Coupon 5.7%
Coupon Frequency 2 (semi-annual)
Issue Amount ZAR 1,500,000,000
Denominations ZAR 1,000,000 and multiples of ZAR 10,000 in excess thereof
Issue Date 30 June 2006
Issue Price 100%
First Coupon Date 31 January 2007
Maturity 31 July 2013
Nominal Value ZAR 100
Redemption Value 100%
Conversion Ratio 3.64964
Conversion Price ZAR 27.40 per Ordinary Share
Call Features Hard Call 3 years
Soft Call 130% trigger
Call Price Principal amount plus accrued interest
Put Features -
ISIN XS0257978337
Listing SGX-ST (Stock Exchange in Singapore)

Summary of the Underlying Stock - 5 June 2009
Secondary Market Valuation :
Convertible Price 63.1288
Parity 49.27
Conversion Premium 28.128%
Absolute Premium 13.8588
Current/Running Yield 9.029%
Yield to maturity 19.292%
Ordinary Share Data:
Stock Price 13.50
Stock Volatility 36.3484%
Dividend Yield 4.37%
Breakeven 4.71 years
Fixed Income Analysis
Credit Spread 9.5%
Bond Floor Value 50.89
Risk Premium 24.05%



Parity

Parity is a very important term for
understanding how convertibles perform.
Parity is the market value of the shares into
which the bond can be converted at the time.
As with convertible prices, parity is also
expressed on a percentage of par basis
premise.
113.78 is actually a market abbreviation for
113.78% of ZAR 100.

Parity
Parity = Conversion Ratio Current Share Price
= 3.64964 ZAR 13.5
= ZAR 49.27
Parity is usually given as a percentage of par amount:
Parity = ZAR 49.27/ZAR 100
= 49.27%
Parity is vital because it will impact not only the price of the bond
but also whether the bond will be converted at maturity or not.
The Table demonstrates how this works by showing the optimal
actions of the bondholders at maturity for different possible
scenarios of the share price at maturity.
.

What happens to Steinhoff 5.7% 2013
ZAR at Maturity ?
Stock price at
maturity(ZAR) Parity
Redempti
on
amount Investor's decision
20 72.99 100 Redeem for cash
27.4 100 100
Indifferent
between
redemption and
share conversion
30 100.5 100
Convert into
shares
It is important to note that in a single currency
convertible, parity moves with the underlying
share price and that parity is normally less
than the convertible price otherwise the bond
would be converted into ordinary shares.

Hard and soft calls
The 3 year Hard call protection means that
the bonds cannot be called under any
circumstances in the first 3 years.
Thereafter there is a soft (or provisional)
call period which means that the bond cannot
be called unless the stock trades above the
specified level of 130% of the conversion price
for a certain period of time.


Conversion Price

The price at which shares are bought upon conversion, assuming
the bond principal is used to pay for the shares.
The relationship between the conversion ratio and the conversion
price is given by the following:
Conversion Price = (Nominal Value/Conversion Ratio)
= 100/3.64964
= 27.4
In a single currency convertible, the optimal strategy would be to
convert rather than allow the bonds to mature if the share price is
greater than the conversion price. In that sense, the conversion
price is seen as a sort of strike price:
A convertible is in the money if Share Price > Conversion Price
A convertible is out of the money if Share Price < Conversion Price