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As equity markets take a tumble, convertibles wait in the wings

Equity-linked bankers are among the very few people who actually like to watch markets fall. This is because depressed equity prices and elevated volatility help to make convertible bonds a lot more attractive, especially given the rising interest rate environment.

Viswas Raghavan, JPMorgan “Convertibles can only benefit from the increased volatility and rising interest rates”
Viswas Raghavan, JPMorgan

“The equity-linked market is looking a lot more favourable,” says Viswas Raghavan, head of debt and equity capital markets at JPMorgan. “Convertibles can only benefit from the increased volatility and rising interest rates. The market will also benefit from asset price corrections. When share prices go down, companies start asking themselves ‘Why should I sell my shares for lower than they were a few weeks ago when I can sell them at a premium through a convertible?’”

Others agree. “It is definitely true that low interest rates and low volatility make CBs less interesting for issuers,” says Eric Lépine, global head of sales for flow and listed products at Société Générale. “The new interest rate trend and volatility gains should mean that we will see more issues in the second half of 2006. This is good news because without new issues the secondary market would continue shrinking. The pipeline should be OK in the second half of the year but it has been pretty tough so far.

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