Lowering the ceiling for equity-linked debt

Despite investment bankers at UBS Warburg sounding upbeat about the potential for European equity-linked deals this year the bank is warning that several factors are likely to stop volumes from rivalling last year’s records.

2001 produced €54.6 billion ($48.4 billion) worth of new European equity-linked issues, a rise of 48% on the year before. But Martin Haycock, convertibles analyst at UBS in London, predicts that figures for 2002 will be around 10% lower in 2002.

Haycock says the main cause of fewer equity-linked deals will be the greater access to the equity markets that companies enjoy.

Closed equity markets in 2001 were key in boosting equity-linked issues last year. Companies unable to raise funds through equity issues were still able to persuade investors to buy equity-linked instruments, because there is a limit to the downside – if the stock price falls investors can rely on the value of the bond.

Although Haycock does not expect equity markets to perform strongly this year there will be stronger investor demand for new issues, he says.

Adrian Lewis, equity-linked origination at UBS agrees. “Although we have got all the ideal factors for good equity-linked issues – low interest rates and volatile equity markets – we may see the equity markets being more open again this year.”

Also, says Haycock, there is a risk that investor demand for equity-linked deals could be lower this year. “If equity markets remain flat in 2002, only €5 billion of convertibles will be converted or redeemed, recycling very little money back to investors for investment in new issues.”

Haycock points out that the underlying equities would have to climb 50% from their present values to change the picture substantially – €15 billion would be redeemed, mostly through the exercise of call options. This will force issuers wishing to use the equity-linked market to offer more generous terms.

This and greater willingness among equity investors to buy new issues will make companies use the equity-linked market because it is their best funding option, not just their only option.

Nevertheless, Lewis says he is still bullish. “Any pick up in M&A activity could encourage companies to once again turn to the equity-linked market to finance new acquisitions,” he says.