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Alain Dib : « Investor demand for convertible bonds is strong »

According to Alain Dib, Global Head of Equity-Linked business at BNP Paribas, the appetite for convertible bonds is greater than the available supply, currently proposed by issuers

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What are the trends in the convertible bond market in recent years, particularly in terms of issuance volume in Europe?

The convertible bond market forged ahead early this year after a morose year in 2011. Here some figures to illustrate my point. Last year, the issue volume amounted to about 7 billion Euros through twenty operations, that is to say the numbers are below the "standards" amounts around the 25/30 billion Euros issued by approximately fifty issuers. But, in the beginning of this year, the market seems to regain its momentum with nearly 3.8 billion Euros of issue programs conducted with a total of seven transactions, most recently for the company Adidas.

What are the latest most important operations, in terms of size on the French and European market?

Two operations have recently marked the spirits. first of all Adidas, for $ 500 million as I said. But the most important issue is the German industrial multinational Siemens, which have issued $ 3 billion of convertible bonds in two tranches: the first one of 1.5 billion Euros, 5.5 years maturity and one second by the same amount, this time with a maturity in 2019.

Do you think the primary market will be on time in 2012?

Yes, the primary market will be on time in 2012, if macro-economic conditions allow it, what appears to be the case in the beginning of this year. We need to understand that investors have plenty of cash available right now and are eager for convertible bonds. The appetite for this type of financial products is in fact greater than the available supply, currently offered by issuers. They have been stung by the recent turbulence in financial markets and reluctant, for now, to engage in convertible bond issues. This was particularly true during the second half of last year, after the stock market crash occurred in the summer of 2011.

How do you explain the current reluctance of issuers while the convertible bonds allow them to borrow at lower rates than conventional bonds?

As I said previously, the current climate is largely responsible for this attitude from the issuers. But, if the situation improves in the financial markets, it should evolve favorably. Moreover, there is currently the first effects of a better market environment, in the rate of convertible bonds issuance recorded in early 2012.

What is your outlook for convertible bonds in the coming years?

Investor demand for convertible bonds is strong. It must be said that these financial instruments have the advantage of having a dual capacity: a potential gain in case of stock market rebound while providing downside protection through their bond component. The strong appetite for these products should continue in the coming years, especially since stock prices are now closer to their lows than their highs.

Convertible bonds seem a particularly desirable asset class, particularly because of its favorable treatment in Solvency II. Demand from institutional investors may be high, is the convertible bond market broad enough to meet demand?

Yes, provided that issuers resume a more sustained rate of issuance, as we saw in 2009 or 2007. At the time, more than fifty operations were performed for such an amount exceeding $ 35 billion per year.

Convertible bonds are among the most difficult instruments to "price" (especially because of their many complex clauses) and yet they are displayed as simple securities to the public, better benefit from Solvency II regulation. Why is that?

Indeed, convertible instruments are difficult to "price" because they include a number of "complex" variables, such as volatility, the repo or credit spreads, for example. Naturally, investors dedicated to convertible are sophisticated investors who fully mastered all of these parameters. At the same time, these products have the advantage of being simple enough to explain to the public. This is simply a bond that allows to contribute positively to an increase in the share price of the issuing company. So it is easy for investors to understand, that in case of rising equity markets, this type of product allows for the long term, to optimize the risk / return ratio compared to a simple investment in shares or bonds.

RF , March 2012

Article also available in : English EN | français FR

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