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The return of the mandatory convertible

Remember mandatory convertible bonds? Bonds that automatically convert into shares acquired a dubious reputation when they were last issued in large numbers back in 2002. Yet they have staged a big comeback this year.

JPMorgan has just sold €1.6 billion of bonds that will be repaid in the shares of German insurer Allianz. UBS has sold €700 million of bonds that will be exchanged for shares in car maker DaimlerChrysler. And Fortis, the Dutch banking and insurance group, has sold $700 million of bonds that will be exchanged for shares in Assurant, a US insurer it used to own. That adds up to almost €3 billion of issuance in just a month.

Investors have clearly got over an aversion to these bonds that led to a hiatus in issuance. That occurred after the last wave provoked an angry response from shareholders. French media group Vivendi Universal and French telecoms equipment maker Alcatel sold mandatories during the bear market of 2002. These deals were controversial as they were effectively rights issues in disguise.

Securities with a stigma

The VU and Alcatel bonds had two important features in common.

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