Equity Commitment Note

Key Takeaways

• An Equity Commitment Note (ECN) is a mandatory convertible bond issued by banks.
• ECNs can be exchanged for stock when they reach maturity.
• These notes are repaid through the sale or issue of new securities.
• In the U.S., the maximum maturity for ECNs is set at 12 years.
• Issuers must fund one-third of the equity every four years.
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What Is an Equity Commitment Note (ECN)?

An equity commitment note (ECN) is mandatory convertible debt issued by a bank or similar financial institution that converts into stock at maturity. Repayment is tied to the issuer's sale or issuance of equity securities, rather than general cash flows like a standard bond. Federal Reserve Bank rules govern ECN maturity terms and equity funding requirements.

How Equity Commitment Notes (ECNs) Work and Key Features

The equity commitment note is a form of corporate debt. It is redeemed by the sale or issue of securities at a future date by the bank or lending institution that issues it.

An equity commitment note differs from an equity contract note in that the investor is not required to purchase the securities in order to redeem the note. The equity commitment note can be redeemed at a later time through the sale of either common or preferred stock.

In the United States, the Federal Reserve Bank sets a maximum maturity of 12 years and requires that the issuing company fund one-third of the equity every four years.1