Across Europe, the Middle East and Africa, only five deals came to market raising just 2 billion; in the US, the number fell from 61 to 35; and in Asia ex-Japan the number of deals slipped to their lowest since the first quarter of 2003.
The $4 billion-worth of issuance in Asia, however, matched that of the first quarter of 2007, which turned out to be a record year for equity-linked issuance from the region.
Volume in the US also held up much better than the fall in the number of deals suggests thanks to three jumbo transactions, all from banks to bolster their capital in the face of asset write-downs. Bank of Americas $6.9 billion, 7.25% convertible was the largest ever public convertible issued in the US.
According to analysts, technical factors are largely to blame for the fall. "Technical factors such as investors risk appetite, prospects for new issuance and asset allocation trends are really dominating convertibles at the moment," says Luke Olsen, convertible bond analyst at Barclays Capital. "Investors in many asset classes have been reducing risk, leverage and capital utilization, and convertibles are not immune. This has resulted in some cheapening of the market, which on the one hand has negatively impacted recent performance, but on the other makes it a more attractive entry point for new investing."
Cost of issuing a convertible compared to a straight bond
Fundamentals, however, remain favourable for convertibles. Convertibles are more attractive for issuers compared with straight debt than they have been at any time since early 2003. Barcaps Convertible Cost Index, which measures the attractiveness of convertible issuance in terms of the coupon/yield to maturity payable by a hypothetical issuer, shows that the interest saving of a typical convertible bond in Emea has grown from about 1% to 2.2% since the end of 2006, as a result of higher equity volatility and wider credit spreads.
The same is true in both the US and Asia, where equity volatility and the interest cost saving of issuing a convertible compared with straight debt have also increased dramatically over the past year as convertibles are less sensitive to the spread widening that has affected much of the credit markets.
In Asia, however, falling equity markets and widening credit spreads are causing complications as they run into regulatory barriers. In India, for example, the falling equity market has led to price floors being above spot prices because rules there calculate the conversion price floor as a function of historical share prices.
"Companies wanting to raise capital are finding that many other markets are either shut or unattractive at present," says Olsen. "The equity-linked market, by contrast, is relatively attractive and relatively open. Its all about relative pricing and relative openness at the moment. On both counts, convertibles currently look a viable option for many issuers, although the investor base is highly price-sensitive."