Despite the help of a couple of jumbo multi-billion euro deals by Fortis and UBS, the European convertibles market appears to be shrinking.
New supply to the EMEA equity-linked market adds up to about €17 billion so far this year while redemptions and conversions have led to a withdrawal of an estimated €27 billion.
The shrinkage would be worse were it not for the growing contribution of deals from the Middle East and Africa, which this year added about €2 billion to the total.
The quiet summer period combined with tough conditions in the credit markets made for a slow third quarter, particularly if the €3.2 billion UBS convertible, issued to help Spanish investor Manuel Jove acquire a 5% stake in BBVA, is excluded. The number of convertibles issued in the third quarter was down 47% from the record number of new issues in the second quarter.
"The Middle East has made a significant contribution to EMEA issuance over the last few years," says Luke Olson, a convertibles analyst at Barclays Capital. "Without some of those larger deals the market would have seen a more significant shrinkage in terms of net supply. Although the size of the bona fide convertibles market appears to be contracting, the volume of synthetic deals is of a similar order of magnitude as the total amount of European issuance, so it is debateable how much the market is truly shrinking. This said, investors would no doubt welcome more convertible issuance from EMEA companies."
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EMEA monthly issuance and redemptions |
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Actual and Q4 ’07 forecasts |
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Source: Barclays Capital |
Asia ascendant
The convertibles market in Asia, by contrast, is growing rapidly thanks to strong issuance and a low level of redemptions. Convertible issuance in Asia is expected to reach a record $25 billion by the end of 2007.
"Asia, by contrast, has been enjoying an alignment of stars in terms of the equity-linked market," says Olson. "There is a lot of investor interest because of the strong performance of the market and there are a lot of fast-growing companies in need of financing."
A growing proportion of new issues in Asia now feature change-of-control protection to compensate investors for the possible loss of optionality that could arise if an issuer gets acquired. Although fairly standard in Europe, such clauses are new to Asian convertibles where investors were previously less concerned about M&A scenarios because they tended to invest in them outright without hedging. The change partly reflects growing concern that Asian issuers could become targets and partly that the greatest amount of new supply has come from Australia, Hong Kong and Singapore, where hedging is possible.