Co Co Could it happen?
Convertible issuance looks set to maintain its momentum and there is the hope for new bank issuance.
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In many ways the European structured equity market broke new ground in 2013 with new issuer types and structures successfully sold, but the raw data show a slightly more prosaic performance.
Issuance volume rose 56.4% to over US$30bn, back in line with issuance of 2009, but the level of bond maturities, M&A takeouts and exercised calls means the net gain in outstanding paper was only about €2.5bn for the year to December 3, according to Barclays data. Since then several other firms have called bonds.
Yet this is ultimately good news for new issuance as it means investors will still be chasing every deal. Investors’ appetite for new exposure is important considering the structural innovation began in 2013 and hoped to continue this year with issuance from financials.
“There is the prospect for innovation in the hybrid space for financials,” said Armin Heuberger, head of EMEA equity-linked at UBS. “Additional Tier 1 capital needs loss absorption on the downside – through writedowns or equity conversion – and with an upside conversion feature on the back of strong share price performance could well make sense to reduce costs and diversify the investor base.”
“In fact, investor interest in a CoCoCo has come a long way, even without a deal. A number of outrights have gone from ruling out participation to saying they could now buy such an issue.”
“The mood is more amenable to innovation and choice of names and structures is likely to broaden,” said Luke Olsen, head of convertibles research for Europe and Asia-Pacific at Barclays. “We haven’t seen CB perpetuals recently, for example, but we think these could return, particularly if there is saturation in straight hybrids and rising bond yields could also make the coupon saving more interesting.”
Regulatory uncertainty has restricted issuance of AT1 paper so far, but there Is already concern about capacity so a convertible hybrid may be embraced by issuers.
“In fact, investor interest in a CoCoCo has come a long way, even without a deal. A number of outrights have gone from ruling out participation to saying they could now buy such an issue”
Even if the CoCoCo does not arrive this year, bankers begin 2014 with more potential issuers than ever before, particularly for exchangeable bonds. There is also a large visible pipeline with Telefonica planning an up to €1.24bn mandatory as part of the acquisition of E-Plus in Germany and Fiat-Chrysler set to mark their marriage with a mandatory.
“The universe of potential issuers has clearly widened due to the variety of issuance options,” said Bruno Magnouat, head of equity-linked at Societe Generale. “Mandatories, exchangeable bonds – including those from holding companies and overcollateralised – zero coupons, longer tenors. The equity-linked solution is now firmly on the CFO and CEO’s desks and it is hard to ignore.”
Though the overall market grew little in 2013, this is not cause for concern. Calls increase when equity values rise, but at the same time this triggers greater issuance. Plus the redemptions expected in 2014 total just €11bn, thanks to many bonds having already been called, according to Barclays’ calculations.