Early Conversion Fee

2024-11-27

The early conversion fee for a Convertible Bond (CB) is a cost imposed on bondholders who choose to convert their bonds into shares before the bond’s maturity date. This fee is designed to discourage premature conversions and ensure that bondholders hold the bond for a longer duration, aligning with the issuer’s financial strategy.

Early Conversion Fee: 2-5%

Overview

The formula used for determining the convertible bond conversion price based on the holding period and apply additional fees based on the number of shares being converted, which affects the conversion share ratio.

Initial Conversion Price

This is the starting price at which the bondholders can convert the CB into shares. For example:

• initialPrice = 1

Note: We assume that 1 GUT is equivalent to $1.

Time Left Until Maturity

The remaining time until the CB reaches maturity will be expressed in either days or months.

• remainingTime: The time left to maturity, measured in days or months.

Base Reduction Rate per Time Unit

A base reduction rate will be applied 0.1% per day or 2% per month. This rate will be adjusted based on the number of shares.

Base Reduction Rate:

• Per Day: 0.1%

• Per Month: 2%

Shares-Dependent Adjustment Factor

The reduction rate will be adjusted based on the proportion of shares being converted relative to the total eligible shares.

The conversion ratio is calculated as:

$$\text{conversion ratio} = \frac{\text{numShares}}{\text{totalEligibleShares}}$$

Where:

• numShares: The number of shares the bondholder wishes to convert.

• totalEligibleShares: The total number of shares the bondholder is eligible to convert.

Adjustment Based on Conversion Ratio

The reduction rate will be adjusted based on the conversion ratio. The greater the proportion of shares being converted, the higher the adjustment to the reduction rate.

The adjustment can be structured as follows:

• Small Conversion Ratio (0 ≤ conversion ratio ≤ 0.2) : No adjustment to the base reduction rate.

• Medium Conversion Ratio (0.2 < conversion ratio ≤ 0.5) : Increase the reduction rate by up to 1%.

• Large Conversion Ratio (conversion ratio > 0.5) : Increase the reduction rate by up to 3%.

Ensuring the final reduction rate is between 2% and 5%, the adjusted reduction rate will be capped between 2% (minimum) and 5% (maximum). So after calculating the reduction based on time and shares, we'll apply this cap.

$$\text{final reduction rate} = min(max(\text{base reduction rate}+\text{adjustment factor based on conversion ratio},0.02),0.05)$$

Now, we apply the final reduction rate to adjust the price over the remaining time period:

$$\text{Adjusted Price} = \text{initial price} \times \left( 1 - \text{final reduction rate} \times \text{remaining time} \right)$$

where,

the final reduction rate is calculated as the sum of the base reduction rate and the adjustment factor based on the number of shares.

$$\text{final reduction rate} = \text{base reduction rate} + \text{adjustment factor based on shares}$$

The applicable fee is determined as follows:

1. If the holding period exceeds 12 months and the number of shares exceeds 1,000,000:

   • A 5% fee is applied.

2. If 10,000 ≤ numShares ≤ 100,000:

   • A fee of 2–3% is applied.

3. If numShares < 10,000:

   • A 2% fee is applied.