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Convertible cat and mouse game

Following a banner year for convertible bonds in 1999, bankers had hoped that the European corporate restructuring wave, capital gains tax changes in Germany, and benign economic conditions would spur the market to even greater heights in 2000. They have been disappointed by a light new issue calendar. However the market is hopeful of an upturn. Chris Cockerill reports

Until Hong Kong conglomerate Hutchison Whampoa burst onto the scene last month with the second-largest equity linked bond ever offered - a $3 billion issue exchangeable into the shares of Vodafone - bankers involved in the convertible debt markets had been especially idle throughout the holiday month of August. While executives in most sectors of the capital markets are usually grateful to slow down in the summer, after the traditionally hectic second quarter funding spree, convertible specialists were quite dispirited.

As one banker puts it: "August was a disaster. Issuers were afraid to put anything into the market because the investor base just wasn't there. The boss goes away and leaves junior in charge. Junior is not going to say 'put me in for 50 and we'll see how it flies'."

A quiet August alone is not to blame for such frustration. The year as a whole had opened with high expectations after 1999's record issuance. This amounted to $31 billion and with economic indicators looking favourable many believed the record was going to be smashed immediately. But the optimism was soon replaced by realism.

"Some of the jumbo transactions that had been mooted at the beginning of the year just haven't materialized," says Julian Kozerski vice-president of equity-linked capital markets at Merrill Lynch, "and that's why we are only running at about 80% on last year."

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