The convertibles market has seen some innovative issues recently and Goldman Sachs has been at the center of the most interesting ones. The Allianz deal was the first to offer event risk protection and as a result, according to Jim Ziperski, head of convertibles for Goldman Sachs in London, it sparked a very positive reaction.
“The market has been clamouring for this for years and Allianz was the first to put this protection in their note,” says Ziperski. “It was a hallmark transaction from the standpoint of an issuer recognizing a need and desire on one part of the market, actually acting on it and getting paid for it.”
Another piece of innovation involved Swiss Re. “It was a triple play bond, the first of its kind,” says Ziperski. “It was really an exchangeable issued by Swiss Re which could be exchangeable to any one of three stocks at the option of the holder.”
Ziperski says investors were prepared to pay a much higher premium and were willing to accept a much lower coupon on the deal. “So Swiss Re got both higher premium and lower costs and it was done because they were sitting on a portfolio, as a number of insurance companies do, of shares which are not perfectly correlated with each other,” he says.
This enabled Swiss Re to extract value from the fact that it held many different stocks long term. The convertible issue was the only way it could crystallise that value, says Ziperski. “It was a very innovative transaction that they did.”
It is deals like this which enable Goldman Sachs to demonstrate its execution expertise, says Ziperski, because in recent years it has been a sellers’ market. “There’s no other place where it’s quite so obvious there’s a supply/demand imbalance other than the European convertible market. There’s just way too much demand and not enough supply.”
The amount of funds available to the market are growing all the time, both geographically and in investor type and the market is experiencing huge growth. Ziperski is not entirely happy with that situation. “We’ve seen a lot of deals occur in an environment where it’s just not that tough to sell,” he says.
In contrast Goldman Sachs is going after harder deals. “We have been getting very difficult or challenging deals done that are either structurally very innovative or getting plain vanilla type deals done in very difficult market circumstances,” says Ziperski.
Overall the European market is becoming much more important, following the arrival of the euro. Previously it was a fragmented group of illiquid markets but with the advent of the single currency it was transformed into a single liquid, fungible, pan-European market.
Overnight deals rose in size dramatically.
“The average deal size is probably north of e600 million which is staggering compared with before the euro,” says Ziperski. “To do a e1 billion deal was unheard of, now they happen regularly.” The effect of this is that previously issuers wanting to do big deals had to do them in US dollars whereas now the euro offers an alternative.
The European convertible market is now following the US model. Tech and telecoms deals are starting to dominate, as they have done in the US for some time. Also credit quality is starting to come down as investors become more willing to move down the credit sector. “In the US, almost everything that moves is sub-investment grade while it couldn’t be more the reverse in Europe but that is changing,” says Ziperski.
With the growth in markets other than the US, he adds, it becomes increasingly important to have a seamless global operation which plays to Goldman Sachs’ strengths.
