How do you entice a highly rated, well-respected and conservative issuer to use a product they've never used before? You offer them a whole new investor base willing to buy a security that bags the issuer savings of 40 basis points over Libor. That's what Wells Fargo managed last month when it issued its first convertible in at least 25 years.
For most of that stretch it was in good company. Convertibles weren't used by investment-grade corporates. Bank loans and corporate bonds offered better funding costs.
That all changed in 2000. New structures made convertibles more attractive. And then the deteriorating economy gave the nascent high-grade converts market a shove by limiting access to commercial paper. High-grade companies could issue a convert structured in such a way that they would pay neither coupon nor yield - zero-zero convertibles - while at the same time having high conversion premiums that at times went beyond 40%. It was essentially free money; some companies, such as Novellus, even invested the proceeds in US treasuries.
Several asset-management companies took advantage of this in 2001 but Wells Fargo stayed away despite solicitous investment banks. "We've had them knocking on our door for three years trying to get us to do a deal," says the company's treasurer, Nino Fanlo.