Merrill Lynch dominates the convertible bonds business. It’s not the largest player in Europe, although is certainly top three, but in the US it boasts a market share in the region of 25% so far this year. And it is in the US where converts have had a stellar 12 months.
What’s more, Merrill has been behind structuring and propagating the largest and most innovative deals of the past 12 months. And it has not been tainted with the claims of buying or being unable to distribute deals that have dogged some of its competitors. In an exceptionally benign environment for converts issuance, that is no mean feat.
One day perhaps defines Merrill’s capabilities best: November 14 2000. On that day Merrill priced the largest convert ever issued – $3.45 billion for Tyco – as well as two others, a $1.5 billion deal for Solectron and a $125 million offering for Province Healthcare.
Combined that made over $5 billion in funds raised, which was more than 8% of the entire amount raised in the convertibles market in the US last year.
The Tyco deal also introduced a new structure to the US market – the zero-coupon contingent conversion. This sets a floor for investors to convert the debt into equity. To be fair, it’s not a wholly new structure – Lehman had first used it in a deal for Bank Austria back in 1999 – but it was the first time it had been tried in the US.
For Tyco it allowed for a much more favourable accounting treatment, keeping the deal from hitting earnings per share estimates, which was crucial given that the proceeds were used to pay for the acquisition of Lucent’s power systems business.
Merrill has continued its dominance into this year, with a market share nearly double that of its nearest competitor. While other houses remained quiet after brief flurries of activity, Merrill has continued to bring deals – at times one a day for more than a week. These have been for all manner of companies and to all manner of investors. Hedge funds have been big buyers of volatility plays, zero-coupon zero yield deals with high conversion premiums of 35% or more. Merrill has also targeted deals at the more traditional converts investors who don’t share the risk appetite of the hedge funds.
One consequence of the hedge fund involvement, as well as ideal conditions for converts issuance, is that more deals for a broader range of companies have been launched this year. Most important, high-grade companies have finally been accessing the US market in large numbers, and Merrill Lynch has been at the forefront of that. In late April, for example, four asset-management firms tapped the market, and Merrill led all of them.
