[A]n equity recourse note ("ERN") functions as debt in normal times. But the trigger for the conversion is the bank’s share price, rather than a regulatory measure of capital. When the share price falls by enough—say, to 25% of its initial value—the bank can make repayments on the bond with new shares rather than with cash.
For example, suppose a bank issues a $50m ERN when its shares are worth $100 each. The ERN would pay interest like a normal bond unless the share price stood below $25 on the day a payment was due or the bond was to be redeemed. In that case, investors would be paid in shares valued at $25 each—even if the market price was lower still. So to redeem the $50m ERN, the bank would issue 2m new shares. Since the share price is below $25, those new shares would be worth less than $50m, meaning the conversion would be a good deal for the distressed bank.
"Miraculous conversion." The Economist. May 16th-22nd, 2015, Accessed on May 16, 2015, http://www.economist.com/news/finance-and-economics/21651313-new-proposal-seeks-make-banks-safer-keep-regulators
More on ERNs here.
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