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Why European equity-linked isn’t what it used to be

European vanilla convertible bonds just cannot shake the blue funk they are in, even as other regions power ahead. Non-dilutive and synthetic structures have kept bankers busy, but they don’t suit everyone

This year’s convertible bond issuance in the US and in Asia has just surpassed 2017's. Both regions look on track to set 10-year records. But in EMEA the story couldn’t be more different. Volumes in the region are just 43% of last year's total – and are down a third from where they were at this point in the year.

The simplest explanation for the regional divergence is rates. “In Europe we just haven’t had the same level of imperative for issuers to look at convertible bonds,” says Tom Swerling, head of the Europe and Middle East equity solutions group at Barclays.

And with good reason: five-year swap rates in euros have been basically flat over the last 12 months, ticking up briefly to about 50 basis points but now at about 25bp to 30bp. Dollar swaps have gone from 1.75% to close to 3%.

EQL volumes graph new

“That is a real movement,” adds Swerling. “A 125bp move in the yield curve, when companies have been used to funding inside 2% to 3%, has motivated a lot of them to look at the convertible bond market.”

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