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Convertibles surge to the front

Convertibles grabbed centre stage last month as European and US issuers took advantage of strong investor demand and the attractive combination of rallying share prices and tightening credit spreads.

Amid the surge of issuance the high premium structure made its first appearance in Europe with Dutch semiconductor equipment manufacturer ASM Lithography's seven-year e330 million offering, managed and underwritten by Morgan Stanley.

Ever higher premiums have been a trend in the US for some time but to the dismay of many European investors the trend now seems to have started to take root in Europe. At 75% the premium on ASML's is nothing exceptional by US standards where premiums of over 100% have started to appear. In April, Wells Fargo issued the second-largest convertible of the year, a $3 billion 30-year non-call five that carried a conversion premium of 110%. Maxtor beat that with a 125% premium on its deal at the end of April.

The high-premium structure has become popular because it allows CFOs to avoid what some equity-linked bankers refer to as the "idiot factor" - giving away equity at prices they might later regret. But a high conversion premium means that the bonds are less likely to convert and the option is more likely to be further out of the money.

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