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CAPITAL MARKETS

Convertibles get a soaking

Investors in convertible bonds have been washed out by the storm in debt, equity and derivatives markets, so potential issuers are having to look to other buyers.

When the first huge write-downs struck, banks placed convertibles at the centre of their fund-raising strategies, issuing billions of dollars of the securities alongside regular share placements to bolster their balance sheets.

Since then, however, equity-linked issuance has dried up, with barely any public deals since the summer, despite conditions such as high volatility and low equity valuations that normally enhance the appeal of the instruments relative to both straight bonds and equity.

The drought of new issues is the result of a perfect storm in the secondary market that has wiped out investors and created a vicious spiral that is by now familiar to investors in many asset classes in which losses lead to calls for redemptions from investors, which in turn forces funds to sell and creates further losses. At the same time, prime brokers are reining in leverage and demanding higher-margin requirements, putting more pressure on funds to sell.

Worst year

"The convertibles market is without a doubt looking at its worst year-to-date performance ever," says Luke Olsen, an equity-linked analyst at Barclays Capital. "Part of the reason is explained by fundamental issues such as falling equities prices and widening CDS levels.