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To: ms.smartest.person who wrote (1039)	4/10/2001 4:10:56 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 2248

European convertible bond market slows down By Rebecca Bream Published: April 5 2001 17:58GMT \| Last Updated: April 9 2001 09:40GMT The European convertible bond market kicked off the year with the most active period for new issues that many can remember. Not only were there high volumes of business, but the deals were among the biggest the market had ever seen. But since the start of March the volatility in the equity markets has taken its toll, and the hectic pace of new issues has slowed. The first quarter saw €13.8bn of European equity-linked issuance, up almost 50 per cent from the first quarter of 2000's figure of €9.2bn. This compares to around $37bn of convertible issuance globally, and a 16 per cent decrease of issuance in the US. The quarter has not been consistantly positive, however, and most of the deal volume was concentrated in the first six weeks of the year when most of the larger Europe-focused deals were completed. In January Hong Kong conglomerate Hutchison Whampoa sold $2.65bn of bonds exchangeable into shares of Vodafone, the UK mobile phone operator. Hutchison had been gradually divesting its stake in the UK group since completing a $3bn exchangeable bond deal last September. This was followed at the end of the month by Telecom Italia which sold €2bn of bonds exchangeable into shares of subsidiaries Telecom Italia Mobile and internet operator Seat. In February France Telecom sold €3.3bn of bonds exchangeable into shares of Orange, completed at the same time as the mobile unit's IPO, and one of the biggest exchangeable bond deals ever sold in Europe. This coincided with a €1.8bn exchangeable deal from French media group Vivendi, selling bonds linked to the stock of its environmental subsidiary. The European convertible market's growth was in marked contrast to the lack of activity in the primary equity market, where the supply of IPOs had all but dried up. Telecoms companies dominated the market during the first quarter, providing around 70 per cent of all equity-linked deals. Many of these borrowers found that the convertible market provided an attractive alternative to issuing straight bonds or equity, markets that were already saturated with paper from the sector. Growth was also driven by the gradual unwinding of cross-shareholdings in Europe, and the strategy of many companies to dispose of stakes in subsidiaries and other companies through the exchangeable bond market. This allowed them to potentially sell the stock at a premium, and the gradual conversion process was seen as a way to protect the existing share price. The deals were helped along by the fact that money had flowed into dedicated convertible bond funds at the end of 2000, both buy-and-hold accounts and arbitrage-driven fedge funds, and investor demand outstripped supply. "The burst of issuance that we had at the start of the year was quite an extreme phenomenon," says Marc Thatcher, head of European convertible bond origination at ABN Amro. But the market's insulation from troubles in the stock market did not last long, and issuers became nervous. "When equity prices feel so sharply in March companies who wanted to issue pulled back from the market," says Katalin Tischhauser, head of convertible research at Goldman Sachs. Many companies felt that unless they were forced to sell, as in the case of France Telecom floating Orange, they would wait rather than give equity away at low prices. German chemicals group Bayer, for example, recently decided to postpone an exchangeable bond to dispose of its stake in Agfa. "A lot of potential issuers are now saying that it is not attractive to do a convertible deal. While equity prices remain low companies will put off their equity-linked funding for as long as possible," says Mr Thatcher at ABN Amro. The convertible bond market revived slightly in the last week with two UK-centred exchangeable issues from Dixons and Cable & Wireless. Dixons sold E230m of bonds exchangeable into French internet operator Wanadoo, while C&W disposed of a stake in Hong Kong internet group PCCW with a $1.5bn. Both deals reflected companies' moves towards exiting investments in volatile internet ventures. The secondary convertible bond market is still performing reasonably well despite stock market woes, but the future direction of the primary market is now dependent on stock volatility declining. Analysts say that equity prices do not necessarily need to recover to help the equity-linked market back on its feet, but for they must at least stabilise. Telecoms operators are likely to carry on borrowing heavily in the market this year, and there are rumours of a large issue from France Telecom. The Greek government is also planning to use the convertible bond market to reduce its majority stake in telecom company OTE. "The European market still has a lot of momentum, and we expect significant issuance for the rest of the year," says Ms Tischhauser at Goldman Sachs. news.ft.com