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Capital Markets

Synthetics: Minor innovation, major change

Investors in convertibles could benefit from synthetic convertible bonds being made more accessible

By jointly placing a synthetic convertible with another bank, SG has hit upon a relatively simple way to widen substantially the appeal of the product.

Synthetic convertibles are convertibles issued by a bank that convert into shares of another company.

Although they could help convertibles investors suffering from the 18-month dearth of new issuance, the promise of synthetic convertibles has yet to take off, as many investors have been held back by multi-establishment listing rules that prevent them from holding the product because they have only one market maker.

Global convertibles issuance volumes fell to $36.4 billion in the first half of 2005, the lowest first-half level since 1997 and down 45% from the same period in 2004.

The €200 million synthetic convertible issued by SG into shares of Italian oil company ENI gets around the multi-establishment listing rules by being jointly placed with a second bank, Goldman Sachs.

"Synthetics allow us to diversify into sectors in which we just can't get exposure," says Fabienne Girard, who heads WestAM's €2 billion outright convertibles fund. "The problem we've had is that these products are all tailor-made and have only one market maker so some of our clients can't hold the products.

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