"In Bonds We Trust": Europe's Converted

Article excerpt


The convertible-bond market in Europe is booming. Once, not so many years ago, it would have been unduly optimistic even to describe it as a market. The past 24 months, however, have seen a distinct turnaround. As Europe busily reinvents itself-through mass privatization, a frenzy of M&A deals, and the evolution of a single currency-the undeniable charms of convertible bonds are piquing the interest of issuers and investors alike. Says David Fischel, managing director of Liberty International Holdings in London: "The market for bond investors is much bigger than the market for equity investors. It's quite a convenient, liquid way for companies to raise capital.You can raise more money, more quickly, in the convertible-bonds market than in the equity market. Nowadays equity investors need to put in a lot of effort: You've got to do very long road shows, presentations, and God knows what else. But with the bond market, all the investors really have to be satisfied on is the credit story. You're 90% of the way there if you satisfy them on the credit story, and they're happy that it's a reasonable price against the ordinary share. From an issuer's point of view it's an easier thing to do.And I'm sure that is one of the key reasons behind the growing convertible-bond market:

But pitfalls loom. The European convertible-bond market is still in its infancy. Market players may yet fail to grasp adequately the hard lessons learned by Asia's capital markets.

Convertible bonds are a hybrid of stocks and bonds. Investors who buy convertible bonds can either hold them to maturity or convert them into the issuer's common shares at a specified later date.They combine the security of fixed income with the upside potential of equity. Clearly, if both debt and equity markets are doing well, the returns on convertible bonds are even better.

Europe, however, has been late to jump on the convertible-bond bandwagon. Three years ago it accounted for a measly 20 % of the convertibles market, with only about $10 billion worth of new issues in 1996. This year it has soared past the United States for the first time, with twice as many offerings to date. It has already issued two-thirds of last year's total with new issues sitting at a pretty EURO 16.8 billion ($16.3 billion).

Last year saw an unprecedented flurry of activity: France Telecom, Europe's third-biggest phone company, hit the headlines with a FFr10 billion issue ($1.8 billion). Deutsche Bank also caught everyone's attention with the first sizable euro-- denominated issue of convertible bonds valued at 1.5 billion. French media and utilities giant Vivendi set the tone for this year's convertible issues with a humongous $1.7 billion issue in January. But only three months later it one-upped this deal with an April issue worth a tidy $2.85 billion. In June, Spanish energy group Repsol also hit the financial pages with a EURO 2 billion offering of convertibles to help refinance its Latin American acquisition.

Investors, too, have developed a hearty appetite for convertible bonds. Last year's F11.3 billion ($819 million) convertible issue by the Dutch unit of Belgian-Dutch banking and insurance group Fortis, was overbooked several times at increasing prices. Pinault Printemps-Redoute, the French retail group, also announced in June that its -920 million convertible-bond offering was oversubscribed three times.

Indeed, France has dominated the convertible-bond market this year, accounting for 74% of European issues in May. Germany, which began to dabble in convertibles rather more recently, has not been so active. So far this year it has grabbed only 4% of the market, compared with 15% last year. However it's expected to put in another stellar performance this year; there are rumors of whopper issues in the pipeline. …