European convertibles issuance will likely fall because of increased regulatory requirements under the European Union's Prospectus Directive, which comes into force in April. Issuance is already under pressure because of confusion surrounding the accounting treatment of the instruments under International Financial Reporting Standards. The poor outlook has investors and origination desks looking for alternative products as low issuance will limit trading opportunities.
The difficulty for banks is synthetic alternatives to the bonds may also face accounting problems. Doug Decker, head of equity-linked origination at Barclays Capital in London, says it has been investigating alternatives for corporates, but it cannot start structuring deals until the accounting rules are clarified. James Eves, head of equity-linked origination at UBS in London, said its convertible origination team has started marketing equity derivatives to corporates to make up for falling converts issuance.
Paul Besson, head of quantitative research at ADI, a Paris-based fund business with EUR4.94 billion under management, said funds will have to look to other strategies as convertible issuance drops. "We have to start considering more strategies," said Besson, adding ADI is looking at different credit derivatives and volatility trades, as well as trading credit against equity.
Under the directive, a convertible bond issue will be treated as an equity structure, which doesn't have reduced compliance provisions for wholesale issuance over EUR50,000, as straight debt listings do. The U.K. listing authority is considering allowing exchanges to offer issuers a parallel market that is regulated by the exchanges rather than the E.U. Keith Thomson, partner at Linklaters in London, noted however, "The question will be whether investors will be happy to buy from these exchanges."
