There are multiple advantages. The issuer sells a package, i.e. a bond, which if converted into equity, will eventually strengthen the company’s capital. The financing cost of a convertible bond issue is attractive because since there is a conversion option, the coupon is lower than on a traditional bond. Access to the "equity-linked" market is also more flexible for some issuers that would have difficulty entering the traditional bond market, which is more restrictive notably because of the ratings levels currently required. Lastly, many investors are now seeking new issues with a balanced equity profile, which accounts for the current craze.

In addition, these issues are very easy to implement: their preparation lasts only a few weeks and their execution only a single day. This sharply reduces the issuer’s exposure to the market. By comparison, a capital increase with subscription rights requires a month between the opening of the subscription and the payment. Moreover, a convertible bond issue is a financing transaction that is easier to justify to shareholders than a capital increase.

Calyon benefits from recognized expertise in this market thanks to its favorable rankings. Our credibility with issuers comes from our substantial track record, our close relationships with them and our ability to provide them a full range of services: not every bank in Europe has a complete team in this segment – research, sales and execution. As an example, we are currently associated with a Scandinavian bank that would be unable to arrange such a transaction on its own.

The market was shut down for several months in 2008 because of a combination of factors: a decline in the equities market, the widening of credit spreads, the Lehman Brothers’ bankruptcy and the drop in hedge funds’ leverage. In early 2009, selling flows dried up and traditional investors with substantial amounts of liquidity in their portfolios had a strong appetite for new issues: they sought to rebalance their portfolios by increasing their sensitivity to equities. In addition, credit spreads narrowed, the equity market continued to be volatile and companies’ significant financing needs enabled the primary market to take off.

Europe is currently undergoing a wave of capital increases amounting to around USD 50 billion. 2008 was the year for bank recapitalizations, and 2009 will be the year for corporate recapitalizations. The first transactions took place in the United Kingdom in mid-February further to the release of annual earnings, including, among others, Xstrata, Wolseley and CRH. The movement then continued in France with Saint-Gobain, Lafarge, Pernod-Ricard and Club Med. Thanks to these successes, several transactions are being prepared for the summer. The convertible bond segment also adapts very well to a challenging environment. Currently it is a fully open and highly active market. Nonetheless, it could shut down just as quickly and the length of time the current window will be open is difficult to anticipate.