The European equity-linked market generated over e9 billion in convertible redemptions in January, which is almost a third of what is expected in maturities and puts through the whole of 2004.
This leaves large amounts of investor demand at a time when issuance is relatively slow. The rate of new issues is unlikely to pick up before the end of this month or March, so those issuers that move quickly are set to meet unusually strong demand.
Redemptions came from companies including Carrefour, France Télécom, Suez/AXA and Vivendi Universal on January 1. They were followed by Hutchison Whampoa/Vodafone and Suez/Fortis exchangeables among others.
French characteristic
The prevalence of French firms is no coincidence; French issues often mature on January 1 because of regulations that mean investors receive the dividend for the calendar year in which they exercise their option to convert. The conversion period usually ends a few days before maturity, so a January 1 maturity brings a conversion period in late December. Investors then either converted their bonds in December 2003 to receive dividends in 2004, or they redeemed the bonds in January 2004 to receive the final coupon. They cannot receive both.
Such large numbers of these bonds are redeeming rather than converting because when a large number of new convertible bonds were issued four and five years ago, they carried conversion premiums over what were already unusually high stock prices. Now that those stock prices are much lower, the bonds are not converting.
It is therefore odd that new issuance levels in January were so low. By the time Euromoney went to press in late January, only five European equity-linked deals had been brought to market that month, and three of those were from one issuer. The total volume issued was e185 million. That contrasts with 11 issues adding up to e5.28 billion in December 2003.
On top of that, the Barclays Capital convertible cost index (CCI) shows that although issuance costs are not at all-time lows, they are cheap. The bank has been producing this index since the summer of 2003. It combines interest rates, volatility levels and dividend yields to create a figure that represents the coupon that a new issuer would have to pay for a new equity-linked deal. The index assumes that the issuer is BBB-rated and that it is issuing in euros with a five-year maturity and a 40% conversion premium. At the end of January, the CCI was at just over 3%.
Barclays' equity-linked origination team also reports that for a range of unrelated and generally internal reasons, the firms that would ordinarily be likely to bring new deals to market are not doing so. When firms start coming back later in the spring, they will probably have little difficulty selling the bonds, especially if they are in commodities-related businesses, which are generally benefiting from high commodities prices.