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Why convertible bonds have been a smash hit in the US

A smash in the US, but tax advantages are not available for Europe.

Equity-linked: Convertibles’ Atlantic drift

Although convertibles have failed to inspire issuers in Europe, thanks partly to modest volatility and unfavourable accounting rules, the product has been a smash hit in the US, where companies have been embracing the instruments as a means to repurchase shares.

Annual volume rose in the US by 80% in 2006 to $71.3 billion, according to figures from Dealogic, and convertibles’ share of total ECM issuance rose to 33%, up from 23% in 2005. In the Emea region, by contrast, convertibles’ share of total ECM issuance fell to just 8%. Worldwide, convertibles accounted for 17% of total ECM volume.

“As many as two-thirds of the deals in the US last year had some repurchase angle to them,” says Brooks Harris, head of convertibles and equity-linked solutions at Deutsche Bank in New York. “The development of call spreads helped to make the product a much more tax-efficient structure for stock repurchases to the extent that convertibles became a favoured instrument for this use to a degree we’d never seen before.”

Call spreads are a private contract between the issuer and the underwriter, which effectively allows the issuer to get a higher conversion premium but without having to offer investors a high coupon.

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