Japan's stock market has problems enough but the country's convertible bond market faces challenges of historic proportions. Once a premier source of funds for capital-hungry Japanese companies, the market has shrunk to a mere capital-markets sideshow, with the market index staggering ever downwards. Now the sector is returning to unwelcome prominence. The market faces colossal redemptions in fiscal 1998, amounting to ¥4 trillion ($30 billion). Efforts by some lowly rated issuers to scrape together the necessary funds to repay maturing convertibles - a burden they never expected - may become quite desperate, since these companies are already feeling the effects of a Japanese credit crunch.
According to the Bond Underwriters Association of Japan, this year's redemption is the highest ever. Issuers are paying the bills for reckless equity-linked financing that became fashionable during the asset-bubble period of the late 1980s and early 1990s, when issuing convertibles and bonds with equity warrants was regarded as a cheap alternative to loans or straight bonds.
Most of the convertible bonds coming due this year are bonds with maturities of seven or eight years that came onto the market in 1990 and 1991. Issuers then confidently expected that they would be converted into equity long before maturity.