Convertible bond sales rose to a record this year as stock volatility increased, boosting the appeal of securities that can be exchanged for shares.
Citigroup Inc. in New York, Oslo-based Codfarmers ASA and more than 800 other companies raised at least $183 billion from convertible debt, 47 percent more than in 2006, according to data compiled by Bloomberg. The bonds returned 8 percent on average, beating the 5.6 percent gain on the Standard & Poor's 500 Index and an average 2.5 percent for corporate bonds, Lehman Brothers Holdings Inc. and Merrill Lynch & Co. figures show.
The securities provided a refuge from the subprime mortgage contagion that pushed corporate borrowing costs to a five-year high. Companies saved 2.6 percentage points on average in annual interest by selling convertible debt compared with corporate bonds in the U.S. this year, twice the discount in 2006, according to analysts at Barclays Capital.
``The convertibles market feeds on uncertainty, nervousness and volatility,'' said Viswas Raghavan, head of international capital markets at JPMorgan Chase & Co. in London, the biggest underwriter of the securities this year. ``Right now, it's the hottest market out there.''
JPMorgan earned about $549 million for arranging convertible bond sales this year based on average fees of 2.16 percent in the U.S., Bloomberg data show. While U.S. and European corporate bond sales slumped 20 percent in the second half to $902 billion, convertible notes rose 25 percent from the same period in 2006, the data show.
`Starving' Investors
The increase was spurred by the highest stock volatility since 2003. Volatility makes options to exchange bonds into stock more valuable because there's a greater chance of reaching the conversion price.
The benchmark Chicago Board Options Exchange Volatility Index, or VIX, which is derived from prices paid for S&P 500 options, peaked at 31.09 last month, the highest since 2003 and up from 12.04 at the start of the year.
``We are all starving for new issues,'' said Giuseppe Mirante, who manages the equivalent of $150 million of convertible bonds at IFP Fund Management SA in Pully, Switzerland, and is too busy with the flurry of new securities to take a winter vacation.
The biggest convertible bonds have been sold to government- run investment pools. Citigroup, the largest U.S. bank, said last month it's getting $7.5 billion from Abu Dhabi Investment Authority through a sale of securities that convert into as much as 4.9 percent of its stock. Zurich-based UBS AG, Europe's largest bank by assets, agreed to sell $11.5 billion that convert into a 9 percent stake to Government of Singapore Investment Corp. and an unidentified Middle East investor this month.
Arctic Cod
Banco Santander SA in Santander, Spain, sold Europe's biggest equity-linked issue to its depositors, raising 7 billion euros ($10 billion) for a stake in ABN Amro Holding NV.
Codfarmers used convertibles last month after the unprofitable six-year-old fish company failed to attract lenders to upgrade its packing plant and raise cod north of the Arctic Circle. The 100 million kroner ($18 million) of four-year notes are convertible into stock at 40.6 kroner, 53 percent more than the current 26.5 kroner per share.
``It's very difficult to raise money right now,'' said Harald Dahl, chairman of Codfarmers in Oslo. ``Convertible investors were eager to buy.''
Transocean Inc., the world's largest offshore oil and gas driller, saved almost $350 million in annual interest by selling $6.6 billion of 30-year convertible notes rather than bonds this month. The Houston-based company is paying as little as 1.5 percent a year, compared with 6.8 percent on $1 billion of 30- year senior notes sold the same week.
Imperial Energy
In return for the lower coupon, Transocean may have to exchange the bonds for shares if its stock reaches $168.61 in the next five years. The so-called strike price was 32.5 percent above the share value when the bonds were sold on Dec. 6. Transocean gained 56 percent this year to $136.89.
Imperial Energy Plc, the London-traded company that explores for oil in Russia, sold $191 million of 5.95 percent seven-year notes convertible for stock at a 45 percent premium to the share price on Dec. 4.
``Our view was that this market was open, the coupon was acceptable and the conversion premium was right near the top,'' said John Hamilton, group finance director for Imperial. ``A high-yield bond would have been an option but that window has become extremely tight.''
Growth in 2008
Sales of convertible bonds were dwarfed by the $3 trillion of corporate bonds sold in the U.S. and Europe this year, Bloomberg data show. The convertible market last peaked in 2003, with $162 billion of sales, before shrinking to less than half that amount in 2005.
Barclays, JPMorgan and Morgan Stanley bankers say sales will be higher next year. SLM Corp., the Reston, Virginia-based educational lender known as Sallie Mae, said yesterday it plans to raise $1 billion of convertible securities and $1.5 billion in new shares.
``We're seeing new issues from all sizes of companies across the whole range of credit profiles,'' said Antoine de Guillenchmidt, head of Morgan Stanley's equity-linked business in London. ``There is every reason to believe that this will continue in 2008.''
To contact the reporter on this story: John Glover in London atjohnglover@bloomberg.net
Last Updated: December 27, 2007 05:05 EST
