FURTHER SCRUTINY OF THE `SCREW CLAUSE'
Bear Stearns has long advocated elimination of the interest-forfeiture provision, more commonly known as the "screw clause," from convertible securities. While we are gratified that this issue is gaining attention in the investment community, we are bothered by several points in your story "Beware the turn of the screw" (Finance, June 1).
[We believe] the screw clause was somewhat misdefined as simply the expiration of the conversion privilege prior to the redemption date. Early expiration equates to a screw clause, or interest-forfeiture provision, only in the instance that a bond or preferred holder would be forced to convert prior to the interest- or dividend-payable date during the call-protection period. After call protection expires, however, issuers of all callable convertibles with which we are familiar can redeem the securities so as to deprive holders of interest and dividends that accrued during the period in which the call occurs.
We encourage investors in new issues to demand the full benefit of call protection throughout the period that it is in effect. Securities described as having three or four years of hard call protection, for example, should have just that, not 2 1/2 or 3 1/2 years. We have been sensitive to this issue for some time and will continue our efforts to eliminate screw clauses from issues we underwrite.
David A. Liebowitz
S. William Gersten
Senior Managing Directors
Clarissa A. Holmgren
Bear, Stearns & Co.
Editor's note: We (and some Wall Street firms) prefer a broader definition of the screw clause--and we believe that convertible-security holders who lose out on a coupon payment would agree.