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European convertible bond outstandings have undergone explosive growth over the past two to three years, reflecting a general upsurge in financing requirements among European borrowers, the attractions of selling large cross-holdings through exchangeable bonds and a ready availability of demand due to a transformation of the investor base for equity-linked securities. Supply did not materialise quite as expected last year, but the market's future looks bright.

While German issuance in the convertibles market has surged over the last 12-18 months, bankers report that they remain disappointed by the appetite for equity-linked bonds among German investors. In a highlight deal such as last year's Hutchison Whampoa/Vodafone offering, for example, German investors accounted only for about 3% of allocations, and even in German transactions they have scarcely been influential: domestic institutions bought about 11% of the Munich Re/Allianz exchangeable and only 12% of the EMTV convertible, according to figures published by WestLB Panmure.

Companies that issue convertibles usually have a wide range of financing and strategic objectives that the product obligingly sets about meeting in full. Many bankers suggest there has never been a better time to issue a convertible bond than at present, and few companies that have tapped the market over the past 12-18 months would disagree with that view. Five issuers described the attractions of the convertibles instrument to EuroWeek.

Hedge funds have emerged as the main drivers of investor demand for equity-linked, but whether the large returns achieved by arbitrage desks over recent months will be sustained is open to debate. High implied volatility levels may be an aberration or a long term trend. While hedge funds have entered the market en masse, another set of investors - equity funds - have largely been notable by their absence.

One of the key consideration for issuers in the convertibles market is clearly the impact that an issue will have on the balance sheet. Although convertibles will usually be regarded by the ratings agencies as debt, the possibility (or probability) of ultimate conversion into equity will also mean that a convertible bond is less likely to exert downward pressure on a borrower than an issue of straight debt. "We start out from the position that convertibles look like debt," says Chris Legg, senior corporate analyst at Standard & Poor's in London. "Although the coupon is lower than on a straight bond there is still the obligation to service coupon repayments, as well as the possibility of cash repayment at some stage in the future."

Lack of transparency in documentation for convertibles new issues has led to some nasty surprises for investors in the European market, but efforts are being made to tighten up the legal small print. There is maybe little chance that documentation in the European market will become as standardised as US prospectuses, but further work is needed if investors are to feel confident that proper safeguards are in place.

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Convertible bonds are a perfect halfway house between debt and equity - giving issuers a versatile instrument that can fulfil any number of corporate finance objectives and investors a product with unique risk/return characteristics. Investors will evaluate convertibles very differently depending on their individual investment criteria, but downside protection with the right to participate in equity appreciation is a basic starting point for the product's appeal.

Matt Milsom, managing director and head of trading for Europe and Asia, has become the latest high-profile derivatives professional to leave J.P. Morgan Chase. Milsom, who came from Chase Manhattan, was offered Asian-based positions following that firm's merger with J.P. Morgan. He resigned at the beginning of the month because he did not want to move to Asia and because positions on offer in Europe were not sufficiently senior, according to an official familiar with the matter. Milsom declined comment.

A $5 million piece of Adelphia Communications' bank debt traded up to 99 7/8. Nextel Communications bids are down slightly to 99 1/2 on the "D" paper and par 1/4 on the "B/C" tranche. Allied Waste is quoted at 98 1/4.

Lehman Brothers and Credit Suisse First Boston are recommending clients buy long-dated swaption vol ahead of the upcoming U.S. Federal Open Markets Committee meeting. In the trade, the banks are recommending clients buy long-dated swaption straddles, whose value increases if long-dated swaption vol rises.

Pricing credit default swaps means, above all, trying to attribute a value to the various components of the underlying asset. In this case, the asset is the credit risk of a certain reference entity, or to be more precise, the reference entity's risk of triggering a credit event.