Pushing it: CB terms become aggressive as paper dries up in redemption wave

Data Insight ECM Explorer 18 November

Pushing it: CB terms become aggressive as paper dries up in redemption wave

Convertible bonds have become a rare animal in equity capital markets and a pickup in deals in recent weeks have proven that bankers have been able to push the envelope as they find investors ready to fork out whatever is necessary to beef up their portfolios before the end of the year.

Throughout 2022, convertible issuance levels have been lagging considerably behind previous years’, according to Dealogic data. Deal value is standing at USD 6bn for a total of 30 deals so far, a far cry from 2021, when deal value was USD 21.8bn, the data shows.

Between 2019 and 2020, there was no less than 50 deals and issuance volume of USD 19bn and USD 35bn, respectively.

A deal in Ubisoft [EPA:UBI] last week enthralled the market but raised some investors’ eyebrows, given it priced through its initial terms, ending up as an expensive deal for investors.

Nevertheless, many decided not to miss out on an opportunity for fresh paper and books closed multiple time covered.

The reason for their eagerness to buy an expensive deal is that the convertible bond market is shrinking, with a huge number of deals maturing in 2022 without enough new issuances to replace them.

Just under USD 22bn of paper has matured this year with only USD 6bn of new issuance. An increase in cash redemptions has left funds with little on their books and an even more expensive secondary market means they are more willing to swallow expensive paper in primary.

“On good equity stories, terms can be aggressive if you sense good demand,” one equity-linked banker said.

Damien Regnier, a portfolio manager for global convertibles at Tyrus Capital, said there is a price distortion in the European CBs due to a high number of low-activity managers passively buying whatever bond would be benchmark eligible, which is causing a heavy skew on the pricing of new deals.

Bonds over EUR 175m in size are eligible for inclusion in the Refinitiv Europe Focus Convertible Bond index, the main industry benchmark, according to Refinitiv documentation.

However, investors are beginning to push back.

This week saw a EUR 305.3m deal brought by Air France-KLM [EPA: AF]. The syndicate only managed to price at the midpoint of the marketed range for the conversion premium (22.5%) and at the highest end of the coupon range (6%), up from initial suggestions of pricing at the cheap end for investors, as reported.

Redwheel converts partner Davide Basile said that the quality bar for new deals is high if coming from issuers in less favoured sectors and therefore a conservative approach is beneficial as syndicates can reprice a deal like banks did with Ubisoft.

"There is a bit of uncertainty because of macro-environment and recent issues have been priced very attractively as there is always uncertainty of how they will be received," he said. "Companies don’t want to bring deals to market and have low take-up, so pricing has been good."

"There is strong pent-up demand for new paper across all regions. There may be a lot of cash on sidelines with a desire to participate in new names with balanced risk exposures," he added.

Some deals have even been postponed, with JPMorgan prepping a synthetic bond into Siemens AG [ETR:SIE], as previously reported by this news service.

Bankers and issuers may try their luck, but investors are urging them not to confuse eagerness with desperation.

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