US convertible bond sales slow sharply

September 23, 2013 9:47 am

US convertible bond sales slow sharply

By Arash Massoudi in New York

The pace of convertible bond issuance in the US unexpectedly slowed through the summer, defying investor expectations that a rapid number of new deals would come to market as interest rates moved higher. Convertible bonds allow companies to issue debt at ultra-low yields but give investors the option to convert the securities into stock if the share price reaches a preset premium during the bond’s tenure.The slowdown comes even though the conditions for new deals have steadily become more favourable for issuers and investors alike as interest rates climb, equity valuations soar and volatility in individual shares increases.

Companies have raised $25.1bn from the market so far this year, surpassing the total amount raised in each of the last two years, according to Dealogic.

But just $5.2bn of that sum has come in the past three months as the pace of deals slowed significantly and dimmed hopes that this would be the most active year for issuance since the financial crisis.

With the S&P 500 hovering near record levels, investors said they feared the overall size of the market may shrink as existing convertible bond holders looked to capitalise on their equity options.

David Puritz, portfolio manager at BlueMountain, said: “At the rate we are going now, US convert issuance may just keep up with what is disappearing from the market in 2013 even though new deals have performed well and demand remains strong.”

One reason for the slowdown has been that companies have been able to count on strong investor interest for fixed income, despite the move in interest rates.

For example, convertible bond investors had expected Verizon to raise $10bn-$15bn of its borrowing to fund its $130bn buyout of Vodafone’s minority stake in a US wireless joint venture. Instead, the company borrowed a record $49bn in corporate debt in a deal that was heavily subscribed.

Venu Krishna, head of equity-linked strategy at Barclays Capital, said: “The convert market has definitely been disappointed by the fact that at a time when a company such as Verizon had a huge funding need, they didn’t diversify their funding sources. Demand has been robust and they could have had structural flexibility and received good pricing.”

He added: “It is difficult to pinpoint the reason because the level of interest from investors and issuers remains high but for whatever reason it has not really translated into more issuance.”

Still, some bankers said that the recent slowdown was a minor blip and that issuance would pick up once again as conditions for issuance continued to improve.

Michael Cippoletti, head of US equity capital markets at BMO Capital Markets, said: “That continued expectation for interest rates to rise is making the prospect of convertible issuance look better and better on a relative cost of capital basis versus high yield.”

 

September 23, 2013 7:33 pm

Further QE erodes bank enthusiasm for securitisations

By Patrick Jenkins

Could it be that securitisation is back in fashion? According to traders, investor demand for recycled asset-backed securities focused on European property has surged in recent weeks.

In particular, US investors such as bond specialist Pimco and JPMorgan’s chief investment office – undaunted by the regulatory row about its $6bn loss last year amid lax controls – are piling into the sector in their search for higher-yielding instruments.

Ben Bernanke’s pre-summer tapering plans might have threatened the trend. But, now that quantitative easing – and free money – is apparently here for at least a bit longer, the search for yield is likely to intensify.

The appetite for European securitisations would appear to be an echo of a broader resurgent faith in the region.US investors pumped more money into European equities in the first six months of 2013 than at any time since 1977.

If securitisations are booming, perhaps it is time to breathe a sigh of relief. The markets are functioning. The worst of the crisis must be over. Sadly, the argument is circular. Investors’ apparent thirst for some of the latest securitisation deals stems from a simple reality – they are chasing a shrinking pool of assets. Most of the offerings relate to refinancings of old securitisations. New “primary” issuance, by contrast, is woefully weak.

In fact, according to the Association for Financial Markets in Europe, a trade body, issuance volumes are at 11-year-lows. In the first half of the year, a total of €83.5bn was issued, the lowest for the period since 2002. If the current pace of issuance is maintained until December, this year will be 77 per cent down on the 2008 peak.

There are multiple reasons. One is that banks’ customers are in many cases borrowing less, providing a smaller asset base for lenders to refinance. Regulatory changes have also made securitisation look less appealing, with high capital requirements imposed both on bank and insurance company buyers.

Underlying it all is a damaged reputation. Bankers admit that the bad name the industry earned at the height of the financial crisis is a big brake on issuance. After all, without securitisation products, the global crisis might never have happened. They were not the root cause of disaster – that was bad US subprime lending – or the final trigger – that was collateralised debt obligations. But if those CDOs, created from chopped-up securitisations, were the aircraft that spread a localised disease into a pandemic, securitisations were the jet engines.

Nonetheless, investor appetite for second-hand deals suggests securitisations might yet have a second coming.

Policy makers and financial innovators are even coming up with new ideas for what the securitisations of the future may look like. A new publication from Suerf, a financial industry forum, contains an intriguing chapter by Patricia Jackson, an ex-Bank of England official turned Ernst & Young partner, which outlines one vision.

Her idea is that, as banks continue to shrink and regulation bites, investors will help foster new kinds of securitisation that pool assets from a range of fast-growing non-bank financiers – peer-to-peer lenders, infrastructure investment specialists, alternative real estate backers.

This may well take off in time. But until then, there needs to be a fresh focus on the useful role that bank-generated securitisations – plain and simple and not repackaged into abstruse derivatives – can play in helping to revive Europe’s economy.

Here, though, is where the ultimate circular contradiction comes into play. Although central bankers’ ultra-low interest rates and quantitative easing policies are helping to fuel investor appetite for high-yielding securitisations, those same low rates are also holding back banks’ fresh issuance. Why would a bank seek funding for its activities in the securitisation markets when it is more easily and cheaply available from central banks? Even the limited deals that are being done are often being retained by issuing banks and used as collateral for central bank funding – half of the outstanding €1.6tn stock of European securitisations has never been sold.

Any decision by central bankers about when to ease off with their extraordinary monetary policies is fraught with complexity – as the emerging markets jitters of the summer showed. But Mr Bernanke and his fellow central bankers should be under no illusion. No matter how supportive their rhetoric about the importance of securitisation for a healthy banking system, investor appetite for deals will remain largely unsated for as long as QE goes untapered and interest rates are at 300-year lows.

Patrick Jenkins is the Financial Times’ banking editor