Market Rate Certification Mandate for a Convertible Bond

Mandate Description

The mandate consisted of issuing a market rate certificate for a convertible bond, in accordance with compliance and financial governance requirements.

The objective of the assignment was to determine the fair value of the implied interest rate, ensuring that the financing conditions complied with market practices and applicable accounting and regulatory standards, in particular IFRS 9 and IAS 32.

Key Issues

The main challenges of the mandate were to model the different components of the convertible bond, including the debt component and the embedded conversion option.

A key objective was to estimate a market-based rate of return reflecting the issuer’s risk profile and the maturity of the instrument.

The valuation also needed to ensure consistency with financing conditions observed for companies of comparable size and operating within the same sector.

Approach and Results

The valuation relied on several complementary analytical approaches.

• A risk-free yield curve was used as the basis for determining the reference interest rate.
• An adjustment was applied using an appropriate sector-specific credit spread to reflect the issuer’s credit risk.
• In addition, the optional component of the convertible bond was modelled using an adjusted Black–Scholes method.

The analysis made it possible to determine a fair market interest rate, which was used for the contractual documentation of the bond issuance and for the internal validation of the financing.

The certification also enabled the objective valuation of the derivative component and strengthened the accounting and regulatory compliance of the transaction.