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Capital Markets

Equity-Linked securities: Convertibles rehabilitated

Steady supply for three months shows market is back; Sub-investment-grade names welcomed

number of converts this year, of which 10 were investment grade

The EMEA convertible bond market has made a recovery and is back as a financing option for corporates. High-quality investment-grade corporate credit has driven a frantic second quarter for debt-capital-raising. "Investors are proving selective and sensitive to equity/credit stories," says Armin Heuberger, who runs parts of equity-linked origination EMEA at Morgan Stanley.

There were only two deals in the first quarter, and those took place in the last week of March. But convertibles issuance in the second quarter has been frenzied, with volumes amounting to €11 billion, which represents more than a quarter of the total equity capital raised and, remarkably, also eclipses US volume.

The revival is long overdue. With a convertible, corporates have more levers to play with: credit, equity and the option. In theory, the convertibles market should have been available to corporate financiers far earlier but the devastation of the traditional convertible arbitrage hedge fund investor base in the wake of the Lehman collapse wrought terrible damage.

Alternative attraction
"If you have a limited amount of financing options – which has been the case for a number of sub-investment-grade issuers this past year – the convertible market can be an attractive alternative," says Heuberger.

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