Riding Europe’s equity-linked wave

The birth of the euro has provided a powerful new boost for the already buoyant European equity-linked debt market, which is enjoying unprecedented growth and development. With interest rates low and stockmarkets high, a growing range of companies — from the blue chip and, increasingly, from the high growth sectors — are queuing up to issue equity-related finance and the investor base is expanding all the time. Now, with a single currency, deals can be done in size and with a frequency that is fast establishing European equity-linked debt as an asset class in its own right. And with the twin themes of corporate restructuring and shareholder value likely to dominate Europe’s financial markets for some while yet, the emergence of an increasingly deep, liquid and diverse equity-linked debt market in Europe looks like being a major feature in the development of the pan-European capital market. Rosie Shepperd reports.

  • 12 Mar 1999
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Just eight weeks since the birth of the euro, it is clear that Europe's new currency has given a powerful new boost to the European equity-linked debt market.

Many bankers are already predicting that 1999 will be the year for equity-linked debt - which is rapidly emerging as an asset class in its own right in the fast developing pan-European capital market.

Market conditions are just right to encourage huge volumes of new issue supply and corporates through continental Europe are especially keen to raise funds through convertible finance.

Interest rates all over the world are falling, or at least stable. Stockmarkets are mostly moving upwards. Europe has a new currency. Investment fund flows on the continent have been liberalised.

The global industrial base is being restructured with the result that companies and banks are streamlining both their business activities and their investments by divesting stakes in unwanted assets through the sale of cheap exchangeable debt.

Each of these factors would, on its own, be enough to support a boom in the convertible debt market. Together, they provide an excellent environment for the growth of a market which has been, until recent years, solely tied to the performance of secondary stockmarkets.

According to research published by Warburg Dillon Read, the volume of equity-linked debt issued in Europe alone has doubled each year for the last three years.

Figures from Capital Data Bondware show that this trend is continuing this year. In 1998 just over $37.1bn in international equity-linked debt was raised through 107 issues.

In the first eight weeks of this year nearly $9bn was raised in 19 deals and new issue volumes are set to expand still further in the coming months.

Says Doug Fawell, director in equity capital markets at Warburg Dillon Read: "Traditionally the first half, especially the first quarter, sees the heaviest new issue volume. The busy start to 1999 sets a hopeful tone for the year."

The astonishing level of absolute growth in the equity-linked market disguises many more subtle features that have developed with the participation of a wider and more diverse range of both buyers and sellers.

Most obviously, the market's success has allowed the average size of convertible transactions to increase - with jumbo deals like SG's recent Eu1.8bn offering of bonds in Vivendi, Deutsche Bank's Eu1.8bn exchangeable into Allianz shares and the Paribas/BNP Ffr13.3bn sale of France Télécom bonds becoming more popular and easier to place as buyers chase liquidity in their investments.

Although this is not new to the market, its growth over the last five years has allowed issuers to raise historically large amounts in convertible finance so that the proportion of deals exceeding $500m now stands at more than 14%, up from 4% in 1993.

Within Europe only 19% of deals executed five years ago were larger than $200m, while last year this proportion reached almost 50%.

There is more than enough money available to fund the exponential growth of this market. The demand for equity-linked debt investments is strong and growing stronger.

David Moore, managing director of convertible securities at Union Bancaire Privée, says: "Convertibles and exchangeables are increasingly regarded as their own asset class. As the volume and diversity of the new issue market increases, market liquidity improves and this allows buyers to consider many more of the opportunities on offer."

The expansion in the overall demand for this product has taken place as the number of funds buying convertible bonds has increased and with a huge shift in the balance of power between different geographical regions.

One of the key developments in the market involves the growing importance of continental European issuers over those in Asia and US and the increased strength of the European investor base over its counterparts in other regions.

As recently as three or four years ago, the convertible market was dominated by issuers from Asia keen to take advantage of the region's soaring stockmarkets.

But the re-rating suffered by these markets after Asia's financial collapse has largely prohibited corporates and banks from raising large amounts of finance in this way.

The US market, though large, consists of largely domestically sold vehicles from high-growth companies with a sub-investment grade rating.

Although this has its own attractions, the market does not provide in any given year a meaningful supply of Euromarket convertible product.

By far the most important area of the market's growth has arisen through the phenomenal expansion in the European convertible product. Last year corporates and banks in western Europe raised $24.7bn in equity-linked debt.

So far this year just over $7bn has been raised by continental European groups, representing around 67% of the global new issue volume. If even the most conservative market forecasts are fulfilled, around $45bn to $50bn could be raised by European issuers in 1999.

The growth of this market has been engineered by several factors. The widespread restructuring of continental Europe's corporate and banking groups has led many large issuers, such as Deutsche Bank, to raise relatively cheap debt by backing bonds with stakes of high quality stock that are no longer required by the newly rationalised entity.

Similar bonds have also been issued by groups funding acquisitions while attempting to streamline their cross-shareholdings to concentrate on core activities.

Two of the established methods of disposing of a large, liquid stock include selling it to a bank for the onward sale into the market or, alternatively, issuing debt exchangeable into shares at a premium to their trading price and with the tax advantage of deferring a balance sheet capital gain until the stake is sold.

The sale of straight stock provides certainty of proceeds and can be employed specifically by a vendor wishing to remain on good terms with its subsidiary company.

The recent part exchangeable/part share sale of Energis by National Grid was largely structured to take account of Energis' wishes to be eligible for inclusion in the FT-SE (where the control of its parent group had to be reduced) and the Grid's wish to maintain friendly relations with the telecom operator.

Says one banker in the market: "It would have been simpler for the Grid to issue a straight exchangeable but this would not have fulfilled its intentions toward the subsidiary group."

When a vendor completes the divestment of an unwanted stake through the underwritten sale of straight stock, the shares are sold at a discount to its market price.

The disadvantage to this method of execution is that, even if the exit price is considerably in excess of seller's original purchase price, the discount to the current market price can be difficult to justify to existing shareholders.

A compromise can be reached, as in the case of National Grid's transaction. The utility wanted to sell out of its Energis shares and wanted also to offer Energis' shareholders the chance to buy stock.

With its bank, HSBC, the Grid structured a transaction to include two tranches - the sale of bonds (Epics), that gave the vendor some chance of participating in any future increase in the operator's stock price, and the sale of straight shares in Energis.

Martin O'Donovan, National Grid's treasurer, comments: "We locked in a disposal price but with the potential to participate in the upside of Energis' stock price. The combined structure ensured that our own shareholders and those of Energis were happy with the divestment."

Other groups to have used some form of exchangeable bond to monetise an investment include Deutsche Bank and the French utilities group, Vivendi.

Late last year the German bank issued Eu1.8bn seven year bonds exchangeable into shares in Allianz, the country's premier insurance group. The deal formed part of the bank's plans to spin off $23bn of industrial assets into separate companies and focus the main bank on its core business that will be expanded following the purchase of Bankers Trust.

The deal was extremely successful, and especially appealed to investors in the rapidly recovering stockmarket conditions that dominated the last eight weeks of 1998.

The exchangeable product has worked particularly well in times of rising stockmarkets. After the carnage wreaked by falling markets during the third quarter of 1998, several companies, such as Pathé of France, launched deals into fast improving markets.

Pathé raised Ffr1.15bn in bonds exchangeable into BSkyB shares when European stockmarkets were making up the losses suffered over the summer.

The vendor's choice of execution contrasts with the £463m sale of stock in BSkyB by Granada, which was executed as a bought deal. In this latter deal, launched at the height of the markets' turmoil, the seller valued certainty of proceeds over the chance to obtain a premium on its potential exit price and opted for a fully underwritten equity placing.

Although most originators in the equity-linked debt market argue that the exchangeable bond is just as suitable in volatile as in rising markets, its use generally declines during periods of market nervousness.

In the first six months of last year 48 international issues were executed to raise $11.7bn and, although the business was expected to expand, new issue volumes were virtually curtailed during last summer's stockmarket corrections. When conditions began to stabilise, issuers returned to the markets in the last few months of 1998.

Ken Robins, director in equity capital markets at Credit Suisse First Boston, confirms that, while investors may not buy convertibles during the worst periods of market turbulence, they recover confidence quickly.

"When the equity markets proved unwelcoming to issuers at the end of the third quarter of last year, corporates turned to the convertible and exchangeable market as a way of raising finance at a premium to low equity prices."

Issuers such as the Dutch retailer Ahold, and its banking compatriot Fortis, were able to use the convertible market to good effect to raise capital in uncertain market conditions at the end of last year.

Both issuers felt that equity investors would be either too nervous to fully value their shares or when they viewed the markets as just too unstable to provide sufficient equity capital through the sale of straight stock alone.

The two transactions provided convertible investors with much needed paper and were priced for success in difficult markets by lead managers ABN Amro Rothschild/Goldman Sachs and MeesPierson/Morgan Stanley Dean Witter respectively.

Ahold's Dfl 1.3bn deal offered investors a coupon of 3% and a premium of 22% and Fortis' Dfl 1.5bn bonds carry a 2.625% coupon with a 25% premium.

The resilience of the demand for equity-linked debt can be attributed not just to the growth in the absolute size of the market, but to the considerable increase in the diversity of funds dedicated to these instruments.

In recent years the range of convertible investors has become broader and the regional pattern of demand for this product has changed.

Ten years ago the market was dominated by equity income funds tending to value convertibles with respect to discounted income growth and the dividend yield on the underlying equity.

Equity investors, especially in the UK, valued the bond with regard to the number of years it took for them to recoup the conversion premium from the higher income generated by the bond.

With the development of both the stockmarkets and the convertible markets, a change in the pricing model used to value these instruments has revealed an equal change in their audience.

The vast proportion of convertible and exchangeable transactions are now bought by dedicated convertible funds and fixed income investors with a decline in the importance of equity buyers.

The participation of fixed income buyers has altered the way convertibles are regarded and this has further reduced the presence of straight equity investors in the market.

Investors no longer use the cross-over model of valuing new issues involving a direct comparison between the income available to maturity on the bonds with that available from the dividend yield on the underlying share.

It is usually the case that the stock backing a convertible bond must satisfy certain minimum criteria on liquidity and, in Europe, often represents a blue chip name. Soaring stockmarket valuations over the last few years have reduced the dividend yield paid by many of these stocks to between 0% and 1.5% and this has coincided with falling interest rates to erode the income pick-up on the bonds over the stock.

Katie Darby, director in equity capital markets at HSBC, points out: "Fixed income investors have been caught by falling rates and now have to look further afield for yield."

Ten year Italian government bond yields, for example, have shrunk in the last four years from 13.8% to 3.9% and the first stage of the unification of Europe's currency has resulted in hugely diminished opportunities for yield enhancement through currency speculation.

"Convertible bonds give fixed income investors an easy credit decision, sector diversity and the prospect of equity-like capital appreciation with downside protection," says Darby.

Together with the growing importance of dedicated convertible buyers, the entrance of fixed income accounts has provided a larger investor base. This has yielded huge benefits for issuers that can use higher conversion premia, features such as cash outs and soft mandatory clauses, the use of higher implied volatilities and lower theoretical values.

Firouz Momeni, director of equity capital markets at Dresdner Kleinwort Benson supports this view. He explains: "Investors in this market now look closely at the level of implied volatility and the expectation of potential upside in the underlying shares. This has drawn maturities in and allowed big companies to capture some of the volatility of their shares and reduce the cost of their capital."

One of the more recent deals - the Eu590m CB for French retailer Promodes - offered investors a conversion premium of 55%, the highest ever in continental Europe.

The five year deal was launched last month by lead manager SG and pays a pretty tight coupon of 2.5%. At a time of roaring stockmarkets and the euphoria surrounding the introduction of the euro, the deal was massively well supported and indicated the extraordinary levels of continental European demand for the product.

Prior to the launch of the single currency, a French deal would have been largely placed with local institutions. Now things are very different. Domestic investors must compete with foreign buyers head on to secure allocations and many have proved themselves increasingly willing to buy aggressively priced deals.

Says Dresdner Kleinwort Benson's Momeni: "The terms available for issuers in the coming year could become quite tight. Pricing will become most cost effective for those companies issuing in size, with a good rating and a high quality, liquid stock underlying the bond."

Although the participation of fixed income investors has increased the importance of an issuer's rating, European investors are less focused on credit quality than their US counterparts.

Convertible specialists say that this is changing and that, as an increasing number of high growth companies use the Euro-convertible market to secure cheap high yield debt, European investors will give more weight to rating.

The US equity-linked debt market has always been driven by credit ratings, which is partly explained by the very different nature of its business. Sub-investment grade borrowers dominate this market - for many years, US investors have had few opportunities to purchase bonds from domestic blue chip corporates which are more than adequately serviced by the straight debt market (where spreads have contracted) and equity markets (where stockmarket valuations have risen) to allow efficient funding without the use of convertible bonds.

When US investors have bought highly rated paper from blue chip corporate and banking groups they have been forced to look to the European markets, where the majority of issuers have traditionally been investment grade.

Of the $27.4bn raised by European corporates last year, $19.8bn was rated from single-A to triple-A. The brisk volume of secondary market trading and the aftermarket premiums achieved by bonds with these credits emphasise the growing importance that investors are beginning to give to credit rating.

When Warburg Dillon Read last year launched the two jumbo Eurobonds for Bell Atlantic exchangeable into NZ Telecom and Cable & Wireless shares, investors were thrilled with both deals.

Says a fund manager at one dedicated US convertible fund run in London: "It is highly unusual to get access to quality rated US paper backed by a large, liquid stock in a growing industry. This type of deal from a US issuer is all too rare and the demand for the product ensures that these bonds can be sold at any time."

Bell's deals were indeed an exception for the US market which has been more familiar with high growth names such as Amazon.com, the internet publisher which recently tapped the market with a $1.25bn deal through Morgan Stanley Dean Witter.

Despite US investors' familiarity with the hi-tech sector, in volatile markets they can be sensitive to deal size. Amazon.com's transaction was very large by the standards of the US market which has traditionally hosted deals of around $125m to $250m.

Launched at $500m, the offering was oversubscribed at terms which included an indicated coupon of 4.75%-5.25% and a conversion premium range of between 23%-27%.

The degree of interest inspired the lead manager to increase the size of the deal to its final size of $1.25bn and to price the bonds at the tight end of the indicated range, with a coupon of 4.75% and a 27% premium.

Unfortunately, this proved to be too much of a test for the US market, at a time when investors were becoming unnerved by the plethora of warnings on the overheated nature of hi-tech stocks given by, among others, Rupert Murdoch, Alan Greenspan and Microsoft chairman Bill Gates.

The bonds traded sharply down and their performance was initially not helped by the strong presence of arbitrage investors in the market.

For any convertible issuer, arbitrage or hedge funds can represent a real threat to a deal and the underlying stock. If these investors are able to borrow a liquid, volatile stock easily they can buy convertible bonds and simultaneously take a short position in the shares.

In unstable market conditions the embedded option in a convertible is worth considerably more and these buyers can purchase around 30% of a new issue.

If they are allowed too great a participation in a deal the price of the bonds in the aftermarket usually suffers as badly as the shorted stock as hedge funds spin out of the bonds after a matter of days.

In a quest to diversify their portfolios away from the high growth sectors, US investors have attempted to take on a more meaningful role in the European equity-linked debt market.

However, bankers say that although they are useful in the support they give to a deal's price, they very seldom provide any guidance as to what that price should be.

But investment bankers say that the balance of power in the investor base has moved decisively in favour of European institutional investors, with the result that the market is more soundly based.

Says Antoine Schwartz, head of European equity capital markets at Goldman Sachs in London: "In the average large European convertible issue, around 75% of the bonds will now go to Europe, 20% to the US and 5% to the Middle East and Asia. Europe constitutes by far the largest area of interest and this is a discernible change from the state of the market a few years ago when the US took the lead."

Although US investors are keen to take up paper, they must compete with European buyers giving aggressive valuations to issuers selling local bonds.

The birth of the euro has dramatically expanded the demand for the product from continental European buyers.

As Goldman's Schwartz explains: "Many dedicated German and Italian buyers have previously been reluctant to invest in French franc denominated convertible bonds. Now they are able to participate and, in some recent euro denominated deals from French issuers, buyers from Frankfurt have demanded more bonds than they would have sought for a deal in Deutschmarks."

This means that, where an issuer does not include a separate US tranche or make provision for US investor participation, a transaction will be more than adequately subscribed by European buyers.

This was certainly the case in the recent Goldman Sachs/Mediobanca deal for Mediobanca exchangeable into Unicredito shares. The deal involved the sale of two lira denominated bonds - $658m over five years offering a coupon of 1.5% and $343m in three year zero coupon bonds.

Neither tranche had a 144A provision and yet demand was so strong that both bonds were well subscribed, in spite of the negative yield to maturity attached to the zero coupon notes.

Mediobanca's deal was one of the few to push investors so hard on terms. Despite the roaring demand for convertible products, issuers and their banks have been surprisingly unwilling to be too aggressive on price. And some professionals feel that the time to lock in cheaper coupons and higher premiums may have passed as renewed bouts of volatility attack global stockmarkets.

Schwartz at Goldman Sachs is cautious of the market's ability to absorb increasingly aggressive terms. His firm's recent Eu1.32bn sale of bonds for Axa (jointly led with Paribas and DLJ) was priced with a coupon of 2.5% and a conversion premium of 29.10%.

The bonds have an implied volatility of around 20% and a bond floor of 91. Although this guaranteed support from dedicated convertible and fixed income buyers, many in the market were surprised by Axa's apparent generosity.

Putting this in context, however, the transaction did constitute the largest ever convertible bought deal on record - and was executed in markets that were beginning to look nervous.

Additionally, Axa's head of financing and treasury management, Francois Robinet, reassured the market with his support of the deal and reiterated the importance of its success in view of the group's proposed acquisition of the UK insurance group, GRE.

Looking at the 102 aftermarket trading level of Axa bonds, the notes compare favourably with other deals launched, with Bouygues at 106, Airtours at 105, Vivendi at 104, Havas at 102 and Promodes at 100.

If stockmarkets stabilise after the recent volatility, many bankers pitching for convertible business maintain that some European issuers can look forward to more aggressive terms.

Danny Palmer, executive director and head of European convertible origination at Morgan Stanley Dean Witter, remarks: "Most deals are launched with an implied volatility in the mid-20s. This is despite the fact that normal secondary market levels for convertibles are often in the mid-30s. As the markets develop further we expect to see new issue prices creeping up to these secondary market levels."

Looking at the conversion premia offered to European issuers, investors are paying historically high levels and this reflects the incredible performance of the continent's stockmarkets over the last few years.

Two years ago, Baan of Germany issued bonds with a then high premium of 28.5%.

As stockmarkets spiral upwards, and more fixed income investors participate in the market, premiums have climbed to recent levels of around 30% with some deals achieving figures of 38% (Benetton), 32% (Deutsche Bank/ Allianz), 31% (France Télécom) and 55% (Promodes).

The biggest obstacle to a further tightening of premiums is the almost inviolate relationship between continental corporates - particularly in France and Italy - and their bankers.

Although rival investment banks attempt to offer competitive terms to secure prestigious mandates, issuers from these markets almost invariably use their lending bank (or in the UK, their broker) to launch convertible bonds and this puts some restriction on premium expansion.

There is a famous story about a large Swiss pharmaceuticals company being wooed by all the big bulge bracket firms for a mandate to lead manage a jumbo convertible.

The group's house bank offered terms including a 3% coupon and a 20% conversion premium. An aggressive newcomer offered a 1% coupon and a 30% premium. The deal stayed with the house bank which executed the business at a 1% coupon and a 25% premium.

Pushing investors to pay more can certainly be justified for vanilla convertibles or quality rated exchangeables backed by a decent blue chip stock.

For partial coupon/premium redemption deals or discounted zero coupon deals, pricing may have to be more considered - especially if the bonds are backed by a stock from a high growth industry.

Says Robins at CSFB: "The impact of the financial crisis last year has enhanced the attractiveness of convertibles to issuers and investors alike. A defensive play, priced off a high implied volatility, suits both the issuers' need for a low coupon/high premium deal and the investors' requirement for capital preservation."

He adds: "Issuers will generally obtain the tightest terms in the market by offering investors current coupons, in the five to seven year maturity range denominated in euros or dollars. Deals which have been priced with lower implied volatilities have typically fallen outside of these requirements and quite often this has had a negative impact on the issuer's stock price due to the activities of arbitrage funds."

Historically the European markets have rarely hosted convertibles from high growth companies. According to Morgan Stanley Dean Witter's Palmer, this may soon change.

"As we see the continued evolution of the NM markets, especially in Germany, hi-tech groups will start to use the convertible market in the same way that it is used in the US," he says.

Already one or two European high growth issuers have executed successful deals. Morgan Stanley Dean Witter ran the books on one of last year's most successful financing packages from Colt Telecom, the alternative telephony provider.

The firm launched the simultaneous offer of £200m in straight equity, DM600m in high yield debt and DM600m in convertible bonds. The three tranche deal was sold right at the height of the booming market for hi-tech stocks and just before the start of last summer's collapse in global financial markets.

The terms attached to the CB were very brave and included a 30% conversion premium, a 2% coupon and a yield to maturity of 4.25% with an implied volatility of 33.4%. Even at the top of a shaky market, the demand from dedicated and fixed income funds was overwhelming and reached DM2.632bn.

Just last week Colt returned to the market, tapping the euro denominated convertible market for the first time with an Eu400m seven year deal on very similar terms.

The new deal is set with the same 2% coupon, a yield to maturity range of 3.75%-4.25% and a conversion premium of 28%-32%. As with the 1998 financing, Colt's equity-linked deal accompanied a straight equity placing, to raise £200m.

Some investors were less than impressed that Colt had returned to the market so quickly for new funds, and the company's share price lost some 10% on the day was transaction was announced. And a weaker than expected response caused the convertible element to be reduced to Eu295m and the equity placing to be increased.

But the telecom stock fever that has swept global markets in recent months has taken Colt's share price from just over £3 to just under £13, putting a 10% fall into perspective.

Earlier this year, Dresdner Kleinwort Benson launched the £300m sale of bonds for UK cable company, Telewest. The company capitalised on the huge levels of interest in the sector and made use of the positive market reaction to its results.

With a coupon of 5-1/4% and a premium of 28%, the deal was many times oversubscribed. Although volatile markets took the initial shine off both the bonds and stock, they recovered ground with the group's underlying equity and were well bid at par.

Telewest, Airtours, National Grid and, most recently, Railtrack have been among the relatively few UK names to have issued sterling denominated CBs in recent months.

New issuance in the UK has substantially fallen off in recent years and many issuers, such as Colt (issuing in Deutschmarks and euros) and National Grid (issuing in US dollars) have declined to use their own currency altogether.

The widespread expansion in the convertible market has not included the UK, where both supply and demand have lagged behind its peer markets on the continent.

UK companies issued equity-linked paper in large amounts in the late 1980s, but many treasurers fell foul of the markets as their deals included put options that were invariably exercised in the years after the 1987 crash.

Since then many large UK companies have chosen to enhance their capital base through share buy-backs rather than by issuing new capital.

Although some large UK deals have been completed in recent months (Railtrack, for instance, raised £400m in late February in a highly successful issue run by Warburg Dillon Read), the largest hurdle to meaningful volumes of new issuance is the UK's exclusion from the euro.

Says HSBC's Darby: "Sterling issuers face two real problems. Firstly, their investor base has lagged behind that of continental Europe as UK buyers have not yet adapted to an environment of falling yields.

"This means that there is no raft of domestic demand prepared to support large deals and not much liquidity either.

"Secondly, the biggest buyers of Euro-convertibles (on the continent) want euro denominated bonds and the spreads being offered to issuers of sterling bonds are just not efficient when compared to euro spreads or US dollar spreads."

This view is shared by other convertible bankers. They believe that, if a critical mass of convertible money is to develop within the UK, investors must either adjust their yield expectations or companies must issue equity-linked debt denominated in euros or US dollars to an audience outside their own market and at more efficient terms than are available at home.

Additionally, some change in the tax treatment of UK exchangeables is required from the present system where it is difficult to structure deals without crystallising some capital gain. This system is unlike that which exists in other countries where the issuer pays capital gains tax when the disposal of an asset is complete.

The prospects for the continued growth in other European markets look excellent with a steady expansion in new issue volumes expected to take place in Germany, France, the Netherlands and Italy.

Already this year French corporates and banking groups have taken the lead by issuing more than 96% of the Eu5.8bn bonds sold by European issuers.

This has pushed SG to the top of this year's convertible league tables after running the books on deals worth $3.07bn, including the first euro denominated CB for Vivendi and a rash of subsequent euro denominated transactions. Next in line is Goldman Sachs, with deals worth just $956m.

The German market is likely to produce a raft of new issues in the remainder of the year and shareholders of some of the country's largest blue chip companies are being asked to approve capital increases now to allow the issue of convertible bonds latter in the year.

Deutsche Bank will certainly continue to pare down its cross-shareholdings and may well issue bonds backed by large corporate and financial groups such as Deutsche Telekom and Munich Re. Industrial giant, Preussag will raise equity-linked debt this year as will Continental and Munich Re (exchangeable into shares in CGU).

The convertible bond market is also likely to grow sharply in the markets of southern Europe. Dedicated buyers in Italy have become one of the market's most important sources of funds and many of the country's corporate and banking groups are getting ready to issue paper.

One of the most prestigious Iberian names, Portugal Telecom, is slated to raise equity-linked finance for the first time through the sale of around $500m to $1bn in convertible bonds.

Investor appetite for the Portugal Telecom deal is keen, with salesmen reporting that prospective buyers are already trying to find out how they can secure meaningful allocations in the operator's bonds.

From the emerging markets, the picture looks increasingly optimistic on both a country and a sector analysis.

Companies in sectors such as gold and minerals, whose stocks have been badly battered by falling commodity prices, may start to feel that they have reached the bottom of the market and that a stock price recovery would be best utilised by issuing convertible bonds.

And although the outlook for new issuance from Russia and Latin America looks bleak, bankers say that emerging market investors and dedicated convertible funds are once again looking for yield through generously priced convertible bonds from markets such as Poland and Hungary.

Trading volumes in outstanding issues such as Elektrim and BPH have picked up in recent months as the premiums on the bonds contract. Bankers say that this is a promising sign that buyers are once again considering investments in this region.

  • 12 Mar 1999

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 70,767.73 236 8.54%
2 JPMorgan 65,265.75 234 7.88%
3 Barclays 56,658.40 187 6.84%
4 Bank of America Merrill Lynch 49,197.71 178 5.94%
5 Deutsche Bank 44,635.32 162 5.39%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Bank of America Merrill Lynch 6,812.19 7 16.21%
2 Deutsche Bank 3,538.77 6 8.42%
3 Citi 2,570.45 7 6.12%
4 Commerzbank Group 2,532.05 5 6.02%
5 BNP Paribas 1,798.71 8 4.28%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 UBS 998.25 3 11.59%
2 Citi 801.18 3 9.31%
3 Morgan Stanley 606.80 4 7.05%
4 Bank of America Merrill Lynch 509.34 3 5.92%
5 SG Corporate & Investment Banking 431.66 3 5.01%