Convertible bond players in Japan were left with millions of dollars of paper losses after Chugai Pharmaceutical called back a JPY30 billion (USD227 million) 12-year convertible bond issue last month. The Tokyo-based pharmaceutical company exercised early redemption on its 2006 convertible bonds at JPY104 near the end of December after a merger agreement with the Swiss healthcare giant F. Hoffman-La Roche. The bonds were trading at a premium of JPY125 before the early call, which resulted in paper losses of up to JPY19 per bond for firms that held the underlying.
"The whole market was upset by [the early redemption]," said a convertible bond trader, adding that most desks likely lost USD500,000 to USD2.5 million on Chugai, with millions more as the overall convertible market dropped approximately 3%. For example, Sony Corp.'s 2005 convertible fell to JPY155 from JPY160 in the aftermath. Several traders, who admitted their firms had also lost money on the trade, said Goldman Sachs and Lehman Brothers are among the largest convertible bond houses and therefore likely took the largest hit, reportedly around USD2.5 million each.Tomoyo Bernal, spokeswoman at Lehman in Tokyo, and Orlando Camargo, spokesman at Goldman in Tokyo, declined comment.
"Whether you held the bond or just the options [via asset swaps], you likely experienced the same losses," the trader added, noting that desks holding the options had to write in the falling value of the related convertible lowering the value of the option.
