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Who will drive convertibles?

Demand for equity-linked issues remains strong but issuance has dropped off dramatically from 2003 levels. Bankers look to slowing stock markets later in the year to revive the sell side of the market.

PRIVATE-EQUITY SELLERS, investment bankers and corporations have been toasting the return of the IPO in 2004. But the biggest change in equity capital markets this year, the near disappearance of equity-linked issues, has gone largely unremarked.

Data from Dealogic show that the total volume of convertibles issued in Europe fell to e3.2 billion in the first quarter of 2004 compared with e10.9 billion in the previous quarter – a decline of nearly 70% – and e4 billion in the first quarter of 2003.

Equity-linked issues accounted for just 9% of equity capital market deals in Europe in the first quarter of 2004 compared with 26% in both the first and fourth quarters of 2003. This fall is even more marked than the increase in IPOs, which accounted for 19% of ECM deals in the first quarter of 2004 compared with 3% in the fourth quarter of 2003 and 4% in that year's first quarter.

It is somewhat surprising that so few chief financial officers have opted for equity-linked deals given the favourable primary market conditions and unsatisfied appetites of convertibles investors.

"Demand is undoubtedly very strong," says Tareen Hussain, head of convertible bond research at BNP Paribas.

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