Last year was a banner year for the European convertible bond market. Will the pace of growth be maintained this year? Or is the new-issue boom about to run out of steam?
The answer, as is the case in most areas of the equity capital markets at the moment, lies in the behaviour and attitude of the hedge funds. They have been the driving force in the convertibles market in recent months, buying up to 70% of all new issues. And they hold the key to future issuance.
It used to be the case that convertible bonds were bought almost entirely by Swiss-based funds and other defensively minded European fixed-income investors, who liked the idea of a bond with an equity kicker, combining downside fixed-income protection with a racy bit of equity option upside.
That's no longer the case. These days the convertible bond market is dominated by the hedge funds, which have injected liquidity and life into what was previously the epitome of the buy-and-hold Eurobond universe. The outright investors have taken a back seat as the hedge funds have dictated the pace in both primary and secondary markets.